A winning system

  • Author : Gary Hepburn
  • Date : April 2013
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.


Advert

Article Search

Browse jurisdictions by clicking on the map regions below

Wealthworks  Capital G  Fidusys

© 2013 Society of Trust & Estate Practitioners