ABOUT THE AUTHOR: Gary Hepburn is Director of
First Names Group in the Isle of Man
Over the Past six years the Isle of Man has experienced an
unprecedented expansion in the e-gaming sector, to the extent that
online gambling now accounts for around 10 per cent of the island’s
GDP, making it the second-highest contributor, behind the financial
services sector. The Manx government has attracted global
organisations by creating a working environment that encourages
e-gaming, providing the right framework of legislation and
regulation. This, aligned with an advanced infrastructure,
including high-speed internet and the right level of professional
support, has helped in this success story.
A vital aspect of e-gaming is ensuring that players’ funds are
protected, and, indeed, gaming regulators outside the island also
have a primary interest in this. The provision of online gambling
in the Isle of Man is governed by the Online Gambling
Regulations Act 2001 (the Act) and is regulated by the Gaming
Supervision Commission. Of player protection, s6(2) of the Act
states:
‘(2) The conditions of a licence shall include conditions
requiring the holder of the licence:
(a) To provide such security (real or personal or both), and to
maintain such deposits and reserves, as are specified in or
determined in accordance with the licence for the payment of debts
arising out of online gambling conducted by him.’
Clearly, it is imperative to ensure that players are properly
protected to keep their confidence high. Before a licence is issued
to an e-gaming company (whether it is already established and
moving from another jurisdiction or is a completely new startup),
the company will need to have a player protection mechanism in
place.
Player protection trust
Isle of Man trusts have been used for many years for various
purposes, including estate planning and asset protection, and have
been tried and tested in the legal arena. Now, these vehicles are
being used in innovative ways to create a structure that provides
player protection in the online gaming industry. Not only does a
player protection trust offer the segregation of player deposits
from the gaming company’s own funds, it also ensures that an
independent party controls those funds.
The trust works by providing players with the guarantee that
their deposits are secured independently, while also benefiting the
e-gaming company by allowing the company to focus on running its
business without operational restrictions that could affect
profitability or service standards. A player protection trust would
usually hold at least 101 per cent of the gaming company’s player
liability, although it can hold an amount equal to the liability.
The latter could lead to potential shortfalls from a timing
perspective. A major benefit of using a trust is that it does not
have to hold the actual player deposits, but simply an amount equal
to the total player deposits or the agreed percentage.
“In a player protection trust a third party controls
the funds representing the player deposits”
Perhaps the most significant advantage is that the online gaming
company can clearly show that unlike segregated client accounts,
where it might be seen that the gaming company controls the funds,
in a player protection trust a third party controls the funds
representing the player deposits. This means the trustees are in
control of the payments, which are made to the operating accounts
of the company. However, the trustees can only control the funds
that are placed into the trust and have no power to transfer funds
into the trust from the company’s operating accounts.
This allows gaming companies to enter new territories while
making sure the gaming authorities of those jurisdictions take
comfort that the player deposits are held completely independently
of the gaming company. This also means gaming regulators can see
that they can influence the behaviour of the gaming company by
ensuring that appropriate language is included in the trust
document, for example by including express provisions setting out
what is to happen if a trigger event occurs (see below).
The way the basic player protection trust operates is as
follows: the e-gaming company will initially settle the agreed
liability amount into the trust once it goes live (e.g. 101 per
cent of the player deposit amount). Once the e-gaming company has
gone live, the player liability will change every day and the
gaming company reports to the trustees detailing the current
liability on a daily basis. The trustee transfers any excess to the
gaming company’s operating account and, in return, should there be
a deficit, the trustees will ask the company to make a transfer to
ensure that the difference is covered.
This means that there are potentially several daily
transactions, so, to ensure smooth administration, it is beneficial
for the trust’s bank account to be held with the same bank as the
gaming company’s, allowing funds to be credited to either account
at short notice. This also minimises the effect on the company’s
day-to-day running and cash flow.
The trust deed will normally contain provisions detailing the
impact of a trigger event. A trigger event would normally include
the following:
- A material breach of reporting by the gaming company.
- The trustee being notified by a licensing authority (usually
defined) of a revocation or sanction of a licence.
- The gaming company ceasing to carry on business.
- The gaming company failing to honour cashout requests (the
proportion can be flexible).
- The gaming company being reorganised.
Depending on the jurisdiction of the licensing gaming authority,
the transfer of funds may require permission from the regulator
before a payment is made. In most cases, however, this applies only
when the amount being transferred equals a significant proportion
of the trust’s value.
One can expect the requirement for the protection of player
money to be multi-jurisdictional, depending on the country in which
the gaming company is providing services, i.e. this is not
necessarily only a requirement of the jurisdiction out of which the
gaming company operates. A trust provides a simple and neat
solution that many licensing authorities recognise, including
civil-law countries that, historically, may not have recognised the
trust concept.
In summary, the player protection trust, in addition to
satisfying the gaming regulatory body (in the Isle of Man and
potentially elsewhere), also ensures that funds are held
independently of the gaming company. The Isle of Man has built
considerable expertise and experience in dealing with online
gaming, but perhaps an area that has not had sufficient focus is
how trusts can be used in the gaming industry. The player
protection trust is an integral tool in ensuring the continued
success of the e-gaming sector.