Football Index – your questions on the Gambling Commission’s role and responsibilities answered
On 23 September 2021, the independent report into BetIndex Limited (trading as Football Index) was published by the Department for Digital, Culture, Media and Sport (DCMS).
Posted 13 October 2021 by Andrew Rhodes
Following its publication, we’ve received a number of questions still arising from former customers regarding the Gambling Commission’s role, responsibilities and our actions.
Since starting in my role as CEO, I have always said I will engage where I can and I have done so extensively with customers of Football Index through Twitter, both prior to and following the publication of the independent report. While Twitter is a useful platform for many reasons it is a difficult forum to engage on complex issues such as the collapse of BetIndex Ltd.
This blog post therefore is an opportunity to set out the answers to those recurring questions that have come in the two weeks since the independent review has been published and maintain the openness that I have strived for since joining the Commission.
I want to address the key questions people have in the hope of clarifying any outstanding points or misunderstandings and have set out my responses below. There are some incorrect interpretations of the actions we took or did not take and there is a degree of misinformation and misunderstanding I want to address.
First and foremost, and before addressing these points, I want to start by saying that I am genuinely upset for those people who bet life savings and money they could not afford to lose on the Football Index platform. I fully understand the difficult situation that has left some people in.
Did the Commission license a ‘Ponzi’ scheme?
The Commission’s view is that it did not licence a Ponzi scheme. The Independent Report considered the Commission’s actions in this respect and made no findings which contradicted this view.
It’s worth highlighting, for those who may have misunderstood on social media, that a Ponzi scheme is something which falsely promises high rates of return with a low risk to investors - similar to a pyramid scheme - where early investors benefit, and it becomes riskier as you move down the chain to more recent investors. There was nothing about Football Index’s operating model when we first licensed it that made it different to other operators, except its reliance on a single product rather than a diverse portfolio.
The Football Index platform saw payments and withdrawals to customers amounting to almost £200m during its six years of operation. It is important to note that a company collapsing with money lost does not automatically make that a Ponzi scheme.
At the detailed financial assessment in early 2020, BetIndex was able to cover the liabilities in bet dividends for at least 12 months (in cash holdings) and potentially for three years if it made significant reductions to its overheads. Therefore, the company did not need to rely on new customers to meet its obligations, which is why it was not a Ponzi scheme.
Whilst BetIndex could meet its liabilities in line with its British gambling licence – the bet dividends and any winnings or un-staked money in customer accounts – in the event of the company collapsing these funds would be at risk. This is an area that sits outside the powers of the Gambling Commission and is one of the reasons why the Commission opened a dialogue with the Financial Conduct Authority (FCA) to explore opportunities for dual regulation.
BetIndex did two things during the pandemic which created a much larger exposure for its customers. It did both without notifying the Commission, which it was required to do. As customers became concerned at the lack of football activity to drive dividends, BetIndex increased its dividends by 50% and, when this did not satisfy customers, it then increased them to 100%. The company ran several promotions to boost returns to customers. In doing this, it depleted its cash reserves at a much faster rate, reducing the longer-term protection for its customers. BetIndex also changed its cash holding requirements from 12 months’ of dividends to just one month.
In these two steps, BetIndex went from having a year’s worth of cash to cover liabilities - rising to up to three years if it made serious cuts to its overheads - to essentially doubling the speed at which it was paying out this money and reducing the money it held to just one month’s worth of liabilities.
BetIndex was not recruiting enough customers to compensate for depleting its financial position in this way and ultimately collapsed as a result. It made these major changes without informing the Commission. We do not oversee gambling operator’s businesses on a day-to-day basis or monitor the financial health of operators directly in real time. That would involve a very different form of regulation to the legislation we currently have and what is funded through licence fees.
Had the Commission been made aware of the company’s actions, suspension of its licence would have come much sooner.
Will the Gambling Commission offer redress?
The Commission cannot offer redress and we have no statutory powers to do this. This is not a choice the Commission is making. Some sectors have statutory compensation schemes and others have voluntary ones. Many sectors do not have this, however, and as such in the Commission’s case, there is no fund from which any redress could be provided in the event of a gambling operator collapsing. I know this is not what people who have been affected want to hear or feel should be the case.
Legislation passed by Parliament treats gambling as primarily a leisure product and therefore it is regulated as such. To provide similar levels of financial protection that you see elsewhere, such as in financial services where there is a statutory fund available to consumers, would require a different approach to regulation in legislation.
Why did you license a product you did not understand?
The independent report didn’t conclude that the Commission did not understand the product it had licensed, but did conclude that what BetIndex operated was only partly what had been licensed by the Commission. In its license application BetIndex did not apply for permission to include the sale of bets between users, nor did it include the Instant Sell function or Market Maker. The ability to sell bets/shares between users was something the company put in place immediately, but it did so without any permission. This is a feature that sits outside gambling regulation and is something that the Commission would be likely to refuse and had done so before.
The Commission is not able to continuously monitor gambling operators and that is not what the regulatory framework or funding model has been built to do. However, when the Commission became aware of this unlicensed facility, it sought to find ways to address it, rather than take steps which would likely collapse the company and cause massive losses to customers.
We know many Football Index users did not stake money based on a three-year return in dividends but did so speculating on up-and-coming players expecting they could make a ‘profit’ in reselling those shares or bets well inside the three-year horizon. Many will have done this, but this depends on there being another user prepared to buy those bets or shares.
Others assumed they would use the Instant Sell feature to take profit in the event of their portfolio being more valuable than their stake. However, this gave users a false impression of what their portfolio was worth. The value of each ‘share’ was based on a current sale value, but this could only be realised by a small number of people. The Instant Sell feature was calibrated to reduce values as users sold bets back to the company. This was calibrated to eventually reach zero. This was done to prevent the company being faced with ‘owing’ more than it could afford if it allowed all users to sell their shares back to the company.
This is most likely why the Instant Sell feature was withdrawn during the pandemic – users would have sought to sell at a high point and exit but would have rapidly seen their value dwindle as others did the same.
The actual operating model for BetIndex was based around the three-year stake and dividend. The financial model was based around those liabilities and ‘sales’ were largely based around other users selling to each other. The user buying the share was paying another user, with the company taking a 2% commission to cover dividends. There are undoubtedly many users who have lost money where the company itself did not receive those funds, but the selling users did make money, bar for the 2% commission. The Instant Sell function was always calibrated to be limited, unless users were prepared to take a reducing price.
Why didn’t the Commission shut down BetIndex in February 2019/March 2020 when it was known they had problems?
There were a range of issues concerning BetIndex from 2018 onwards, but these were not concerning the financial viability of the company. Compliance failings by a gambling company operator can be for various reasons and are not uncommon. All operators are given an opportunity to improve and bring themselves back into compliance before we would consider suspension or licence revocation. If the non-compliance is so serious that we do not believe it is safe to allow the company to operate while they make these changes, then we will suspend their licence.
In the case of BetIndex in 2018, 2019 and early 2020, their compliance issues were related to the way they promoted the product, safer gambling controls and terms and conditions of operation. To be clear, these were serious failings and in no way acceptable.
Had the Commission suspended BetIndex’s licence at this time, it would have caused its customers to lose significant amounts of money as customers were already locked into open shares. We were always conscious that any steps we took could negatively impact on consumers already active on the platform and create a ‘cash run’. Our focus therefore was doing what we considered was best for consumers. The Commission was able to secure improvements in compliance from BetIndex but at that time, there were insufficient financial grounds on which to suspend the licence.
During our investigatory process we acted on a number of issues we identified. We: -insisted the operator review and change their website marketing to make it clearer to consumers that they were gambling, and not investing -instructed them to review and change their terms and conditions so that they were compliant with consumer protection regulations and were transparent and fair -continued to seek to work closely with the Financial Conduct Authority (FCA) to address any overlap between our jurisdictions.
We have also conducted our own internal investigation into BetIndex Ltd and have put new processes in place to pick up on novel products to ensure we hold ourselves to account in an ever-changing environment.
Why didn’t you inform us you were investigating Football Index, a product you endorsed?
We cannot talk about individual cases or businesses we are investigating. We will, however, publish sanctions once the individual or business involved has been informed and any objections to publication have been considered.
There has also been some misunderstanding that the Commission ‘endorsed’ the Football Index product. As a regulator, endorsing a product or any gambling business is not something the Commission can or would do. What we do is grant a license to operate; this does not mean the company is backed by us.
Some have claimed the Commission awarded ‘tier one’ status to BetIndex. Tier one simply means the company is now in the higher end of the market in terms of Gross Gambling Yield (GGY), which is how much money the company has made after winnings are paid and before it pays taxes etc.
You blamed Football Index Customers by saying consumers should not gamble what they cannot afford to lose.
This was never my intention.
Football Index users cannot have been responsible for the company collapsing and therefore their money being lost. Even if it was argued that BetIndex put the company at risk in trying to satisfy its customers with increased dividends it could not realistically afford, the company was responsible for that decision.
Life-changing amounts of money were gambled on Football Index and we should always urge people not to bet more than they can afford to lose. I know a lot of people were angry when I said that, and I also know many feel they did not lose their bets and their money was stolen, but money used to place a bet is always at risk, no matter how confident someone might be.
Why won’t you talk to those people affected by the collapse of Football Index?
Where I can, I have responded to many groups and individuals on social media, and answered questions both in advance of, and following, the publication of the independent review on 22 September. But I recognise that social platforms such as Twitter aren’t always the easiest or most appropriate place for such conversations.
Now the report has been out for three weeks, I feel it is the right time to talk face-to-face. That is why I have invited members of FI Group Action to a meeting at our offices to discuss their concerns. I hope a date and time for this meeting will be confirmed very shortly.
Summary
Football Index had a large and enthusiastic customer base, and some made considerable efforts to find a way to revive the company after its collapse. In February 2020, the company had enough money to pay its liabilities for a whole year without attracting any new customers. If it made serious cuts to its overheads, it could have extended this up to 3 years and potentially met all of its liabilities from the bets placed. There were non-compliance issues and practices that needed to be changed, but not severe enough at that point to stop the company operating.
During 2020, the company drastically changed its financial position without any notification to the Commission. The company went from holding significant cash reserves to meet its liabilities to voluntarily doubling its liabilities to customers without any means to replace those funds, beyond attracting new customers at a time when football was largely suspended. The company then changed its policy to hold only one-months' worth of cash to meet liabilities. The company spent the money it had much more quickly and failed to find ways to replace it. This led to the collapse of the company.
The company did not tell the Commission what it was doing with its financial position and the risks this posed to its own customers. When the Commission became aware, it was, in hindsight, too late to prevent the losses customers then experienced. The Commission continued to try to find ways to find protections and interventions for customers outside its own powers, but ultimately did not succeed. The independent review has concluded that the Commission should have drawn a line under those efforts earlier, given what we now know happened. I agree with this, as do my colleagues.
Our findings in relation to BetIndex and its directors have been referred to the Insolvency Service for their consideration of any offences they feel may have taken place. The Commission’s own investigation has resulted in the revocation of BetIndex’s license to operate. The Personal Management Licenses of those who ran the company were surrendered by them, but the Commission will still proceed to a finding of fact in relation to their conduct as licensees in the very near future. Neither of these licensing events will make any personal difference to those who have lost their money as a result of the BetIndex collapse, but there are nonetheless matters the Commission is obliged to conclude.
While I was not Chief Executive or employed by the Commission when BetIndex collapsed, the level of contact I received when my appointment was announced left me in no doubt of its importance, and it has been a significant part of where I have spent my time since joining the Commission in June of this year.
As Accounting Officer, I take responsibility for the Commission and the actions we take as a result of what happened and there are many things we already do differently and there are things that will form part of our advice in response to the Gambling Act Review.
I hope that what I have set out does provide some insight and clarity into what happened and what the Commission can and cannot do as a result.
Edit: We have edited the wording from ‘The Commission did not license a Ponzi scheme, and the independent report’s findings concluded that Football Index was not operating as a Ponzi scheme’ to ‘The Commission’s view is that it did not licence a Ponzi scheme. The Independent Report considered the Commission’s actions in this respect and made no findings which contradicted this view’ to prevent any misunderstanding this line might have previously created.