Gambling Commission warns of implications of change of control approval failures

The Gambling Commission has issued reminders to its licensees of their obligations to seek the Commission's approval for a change of corporate control ("CoCC"). The warnings – circulated as part of the Commission's E-bulletin in April and May – explain that, whilst in the past the Commission has given licensees the opportunity to explain late approval requests, from July the circumstances in which such relief will be granted will be limited. This greatly increases the risk of the Commission revoking a licence where a licensee is delayed in seeking approval for a CoCC.

Regulatory obligations

Section 102 of the Gambling Act 2005 (the "Act") provides that, if an individual or legal entity becomes a "controller" of a Gambling Commission licensee (in other words there is a CoCC), the licensee must inform the Commission and either surrender its licence or apply to the Commission for a determination that the licence will continue to have effect. Having evaluated any such request, the Commission can either make the determination sought (if it is satisfied that it "would have granted the operating licence to the licensee had the new controller been a controller of the company when the application for the operating licence was made") or revoke the licence.

The Act provides that if the Commission becomes aware that a licensee has failed to comply with its obligations in s.102 within 5 weeks of the relevant CoCC taking place, it "will" revoke the licence (although in practice – and as evidenced in the Commission's latest reminders – it is really the case that the Commission "may" choose to do so, depending on the circumstances).

What constitutes a "controller" is defined in s.422 of the Financial Services and Markets Act 2000 ("FSMA"). The FSMA definition is by no means simple, with certain shareholdings being disregarded and certain types of interest being aggregated or receiving some form of special treatment. Essentially, however, a controller of an entity is anyone that holds:

• 10% or more of the allotted shares in that entity (or a parent of that entity);
• 10% or more of the voting power in that entity (or a parent of that entity); or
• shares or voting power in that entity (or a parent of that entity) which enables it to exercise "significant influence over the management" of that entity.

Licensees are also under a separate obligation under licence condition 15.2.1 of the Commission's Licence Conditions and Codes of Practice ("LCCP") to notify the Commission, as a "key event", of any shareholder acquiring a 3% or greater interest in the licensee. Licensees must do so within five working days of the event.

Taken together, s.102 of the Act and licence condition 15.2.1 of the LCCP mean that, where a CoCC occurs, the licensee must notify the Commission within five working days and then submit a CoCC approval request (using the Commission's CoCC application form) within five weeks.

The Commission's warning

In its reminders, the Commission states as follows:

Currently, upon receipt of a late CoCC application, the Licensee is given an opportunity to explain the delay and an extension to apply has been granted where an adequate and reasonable explanation has been given. However, an increase in the complexity, and number, of applications means we will be taking a stricter approach to late submissions.

From July, where the explanation is considered not to be adequate or reasonable, there will be a refusal to grant an extension and revocation in instances where the new controller is unknown to the Commission and is not:

• regulated by the Financial Conduct Authority (FCA) or
• an immediate family member entering a small family business.

This represents a shift in the Commission's approach to late CoCC approval requests, increasing the likelihood of licence revocation.

Recommendation to licensees

The issue with the FSMA definition of a "controller" is that a CoCC can be deemed to have occurred, and therefore a licensee's obligation to seek approval triggered under s.102 of the Act, as a result of changes in the licensee's ownership structure that result in no change at all to the licensee’s ultimate beneficial ownership and, as such, are often assumed not to represent a CoCC.

A typical example is the insertion of a holding company. Whilst the ultimate beneficial owners would remain the same, and the holding company itself would exert no "control" in the normal sense of the word, such a company would still constitute a new "controller" under the FSMA definition and therefore the licensee would be obliged to notify the Commission.

It is not clear what the Commission deems to be an "adequate and reasonable" explanation as to why a CoCC is not filed on time. Given the severe implications of getting it wrong, however, all licensees would be wise to assume this will be very limited. Licensees should also ensure that there is understanding at all layers of their ownership structure of what changes might trigger the licensee's obligation to notify under s.102. Whilst this should be straightforward for licensees with relatively simple ownership structures, it is substantially more challenging for those with more complex structures (for instance those with private equity backing).