Policy
Fourth National Lottery Licence: Regulatory Handbook
The Commission’s regulatory handbook sets out our regulatory approach to the National Lottery.
16. Condition 18: Financial and Operational Resilience
16.1 This section provides guidance related to Condition 18, specifically with regard to:
- Conditions 18.6 to 18.8 relating to Significant Business Events
- Condition 18.20 relating to a change in Gambling Law or Fundamental Geographic Scope Change.
16.2 Note that additional guidance related to Resilience Assurance Statements is provided separately in section 22.
Significant Business Events
16.3 Significant Business Events are defined in Condition 18.6 and may arise in relation to dividend payment, refinancing or changes to the Technology Operation, among other things. The definition of Significant Business Events, which is subject to a materiality threshold, means that it is unlikely to capture decisions made as part of the ordinary course of business. For example, a decision to approve a dividend payment may not necessarily constitute a Significant Business Event; this would depend on whether it could reasonably be expected to have a material impact on the National Lottery, the Licensee or a Licensee Subsidiary, as per Conditions 18.6(a) and (b).
16.4 Conditions 18.6 to 18.8 enable us to intervene if we conclude that a Significant Business Event will cause material damage to, or risk of material damage to, the operation of the National Lottery in compliance with the Fourth Licence. The requirement for information, provided as part of the Unqualified Resilience Assurance Statement and any additional information we may request, is to enable us to make that assessment.
16.5 The intent is not to prevent the Licensee from undertaking business events as part of the ordinary course of business. In all cases we are required to act reasonably in accordance with our public law duties – this means that we would need to have a good reason to seek further information from the Licensee.
16.6 We have deliberately not set specific thresholds for what may constitute a ‘material impact’ with regard to Condition 18.6. For example, as per Condition 18.6 (b)(i), the level of dividend payment by the Licensee, or any other form of distribution to the Licensee’s shareholders, that could have a ‘material impact’ and thus be classified as a Significant Business Event will vary depending on the overall financial and operational health of the Licensee. In some years, a high percentage dividend pay-out may be appropriate and low risk, whilst in other years it may be higher risk and therefore not appropriate.
16.7 If the Licensee if required to provide the Commission with an Unqualified Resilience Assurance Statement in relation to a Significant Business Event, it is the responsibility of the Licensee to have presented its Board with appropriate evidence to secure sign-off prior to providing to the Commission.
16.8 Figure 2 below illustrates how Conditions 18.6 to 18.8 would be applied under the Fourth National Lottery Licence.
The Significant Business Event process is as follows:
Step 1: Licensee is considering a business event including:
- payment of a dividend or any other form of distribution
- a refinancing; or
- material change to the Technology Operation.
Step 2: Would the proposed event at implementation or within the next two years reasonably be anticipated to have a material impact on:
- the operational or financial resources of the Licensee or any Licensee Subsidiary; and/or
- the Licensee’s ability to run the National Lottery and its operations in accordance with the Fourth National Lottery Licence?
For the Licensee to consider in conjunction with its ability to provide an Unqualified Resilience Assurance Statement. We will consider in relation to the review of the Unqualified Resilience Assurance Statement and/or any information that we have requested.
If the answer to ‘Step 2’ is ‘No’: It is not a significant Business Event. Licensee can implement the business event.
If the answer to ‘Step 2’ is ‘Yes’: Proceed to ‘Step 3’.
Step 3: Classified as a Significant Business Event and the Licensee must inform us. Upon notification by the Licensee, have we otherwise approved the Significant Business Event without the need for the provisions of an Unqualified Resilience Assurance Statement?
If the answer to ‘Step 3’ is ‘Yes’: Licensee can implement the Significant Business Event.
If the answer to ‘Step 3’ is ‘No’: Proceed to ‘Step 4’.
Step 4: Licensee is required to provide an Unqualified Resilience Assurance Statement to us setting out the impact of the Significant Business Event on the Licensee’s operational and financial resources and its running of the National Lottery. Do we provide a request for further information within 20 Business Days?
If the answer to ‘Step 4’ is ‘No’: Licensee can implement the Significant Business Event.
If the answer to ‘Step 4’ is ‘Yes’: Proceed to ‘Step 5’.
Step 5: We may request further information regarding the Significant Business Event within 20 Business Days of receipt of an Unqualified Resilience Assurance Statement. Following receipt, do we confirm that the Licensee can implement the Significant Business Event?
If the answer to ‘Step 5’ is ‘Yes’: Licensee can implement the Significant Business Event.
If the answer to ‘Step 5’ is ‘No’: Proceed to ‘Step 6’.
Step 6: If we are not satisfied with the Unqualified Resilience Assurance Statement and further information provided by the Licensee, we may not provide confirmation that the Licensee may implement the business event. This action would be aligned to our statutory duties.
Change in Gambling Law or Fundamental Geographic Scope Change
16.9 When considering whether to use our powers to vary, add or remove Licence conditions under Section 8 of the Act, our statutory duties and the principles of public law will apply with respect to any decision we make in relation to whether those powers should be used at all, and if so, how they might appropriately be used.
16.10 Without limiting our ability to use those Section 8 powers more generally, we anticipate that it may be appropriate to consider exercising those powers (whether at the request of the Licensee or otherwise) if there is a change in Gambling Law or a Fundamental Geographic Scope Change which in either case results, or is reasonably likely to result, in a Material Impact on Profitability.
16.11 If the Licensee wishes to ask us to consider exercising our powers under Section 8 of the Act in accordance with Condition 18.20 of the Fourth Licence, we will expect the Licensee to provide, within 12 months of the relevant change, evidence which satisfies us that the change has resulted, or is reasonably likely to result, in a Material Impact on Profitability, even if the Licensee does, or has done, everything it can to avoid that outcome.
16.12 If we are considering exercising our powers under Section 8 of the Act because of a change which has resulted, or is reasonably likely to result, in a Material Impact on Profitability, we would expect to do so on the basis of evidence which satisfies us that such Material Impact on Profitability has taken place or will take place.
16.13 As set out in Conditions 2.4 to 2.6, there are certain Licence conditions and definitions that, in accordance with Section 8(3)(b) of the Act, we can only vary with the consent of the Licensee. As per Condition 2.6, this includes Schedule 5 and Appendix 1 to Schedule 5. However, in a limited set of circumstances (a change of Gambling Law or a Fundamental Geographic Scope Change) that result, or may result, in a positive Material Impact on Profitability, we may vary Schedule 5 and Appendix 1 to Schedule 5 without the consent of the Licensee, if so required in connection with Condition 18.20.
16.14 If we vary the Fourth Licence under Section 8 of the Act, including in the circumstances outlined in Condition 2.7, we must do so in accordance with our statutory duties and in line with public law principles.
16.15 The presence of Condition 18.20 does not preclude the Licensee from requesting that we consider exercising our powers under Section 8 of the Act in relation to events that are not captured under ‘a change in Gambling Law or a Fundamental Geographic Scope Change’. We would consider any such requests in accordance with our overall regulatory approach, taking into account our statutory duties and public law (see Section 5).
Business Continuity
16.16 Condition 18.3 requires the Licensee to have in place business continuity plans, including strategies, policies, processes and procedures. As part of this we expect the Licensee to have in place plans to respond to a situation where the reserves held in the Trust are insufficient to meet required Prize payments due to residual portfolio volatility.
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17. Condition 27: Exit
Last updated: 1 February 2024
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