Fourth National Lottery Licence: Regulatory Handbook
5. Key features of our regulatory approach
5.1: Through our more outcomes-focused approach we will create the freedom for more Licensee flexibility, where appropriate, while improving accountability in terms of delivering positive outcomes more broadly. We recognise the National Lottery operates in a dynamic environment and the ability to innovate on an ongoing basis is likely to be key to it remaining relevant and being able to prosper over time, for the benefit of Good Causes and Participants.
5.2: In line with this, our approach consists of four key elements:
- making our Fourth Licence approach more outcomes-focused
- better aligning incentives between the Licensee and Good Causes
- providing greater flexibility for the Licensee
- increasing Licensee ownership over its performance
5.3: Across all of these elements, we will act in accordance with our statutory duties and the principles of public law, including with respect to rationality, fairness and reasonableness.
5.4: We expect to have a range of communication channels with the Licensee, including working-level relationships as well as giving the Licensee and us the opportunity to escalate strategic and operational matters at the appropriate level(s) within both organisations and with wider stakeholder groups. This will include scheduled meetings with senior Commission officials to discuss strategic matters, risks, opportunities, performance and sharing and contributing to industry wide best practices and developments.
5.5: We describe each of the four elements further and provide some illustrations of how they have affected, and/or might affect, our regulatory actions.
Making our Fourth Licence approach more outcomes-focused
5.6: Being a more outcomes-focused regulator has implications across our Regulatory Model, including the design of the conditions of the Fourth Licence and Section 6 Licences. It also affects the approach we take to monitoring performance and any associated enforcement in relation to those conditions.
5.7: We have explored and tested the scope for and likely benefits of defining Fourth Licence conditions in ways that are less restrictive in terms of how a desired outcome is achieved. We have adopted this approach in areas where risks of more flexibility can be managed and/or mitigated effectively. This approach has two key benefits:
- it allows the Licensee flexibility (something that is conducive to innovation)
- it offers greater future-proofing from a regulatory perspective in a context where highly specific requirements may fail to provide for effective protection over time in dynamic environments (for example because they may become out of date in important respects)
5.8: This does not mean we favour broader and more flexible requirements in all circumstances. In some areas, given identified risks of harm, we consider more specific controls/requirements are appropriate. For example, we consider it appropriate to have an explicit requirement for the vetting of all senior staff. This is a safeguard that supports the requirement for the Licensee to be fit and proper.
5.9: The Fourth Licence and Section 6 Licences are designed such that the majority of conditions set out an ‘overriding duty’ that the Licensee is required to satisfy. The conditions provide some specific obligations for the Licensee to meet in relation to the overriding duty but are not exhaustive. Per Condition 1.5, and in line with our outcomes-focused approach, compliance with each of the specific requirements may not necessarily be sufficient to meet the outcome set in the overriding duty.
5.10: Our more outcomes-focused approach is also an important statement about our focus and priorities, and about the focus and priorities we expect the Licensee to adopt. This impacts how we expect to monitor Licensee performance, and to assess compliance. Our approach to any given circumstances will be guided, to a significant degree, by the materiality of the associated risks to the achievement of the outcomes set out in the Fourth Licence. Where there is evidence to suggest a higher degree of risk in relation to specific outcomes, plans or periods of time, we will consider whether additional oversight is appropriate to safeguard the delivery of our statutory duties.
5.11: We also recognise that, within an outcomes-focused approach, the Licensee can benefit from further guidance over what we will take into account when assessing compliance with the outcomes-focused conditions of the Fourth Licence. We provide this further guidance within our Monitoring Performance Framework (see volume two). The Monitoring Performance Framework does not provide an exhaustive list of relevant factors and metrics we will consider when assessing compliance, however it does provide a reference point against which we expect to consider the relevance of any other evidence.8
5.12: Our Regulatory Model encourages the Licensee to be focused on delivering the outcomes set out in the Fourth Licence. This involves the Licensee taking ownership of developing and applying policies, processes and procedures to provide effective means of identifying, mitigating and managing the risks associated with the achievement of the outcomes set out in the Fourth Licence, and satisfying itself as to their ongoing effectiveness. We will expect the Licensee to use assurance statements and other measures (further described in volume three) to demonstrate to us whether, and how, it is achieving these outcomes.
5.13: If we identify that outcomes set out in the Fourth Licence have not been achieved, as part of assessing compliance with the Fourth Licence, we will look for evidence of the appropriateness and adequacy of the Licensee’s risk management policies, processes and procedures, and the effectiveness with which it has applied these. Our assessments of compliance may take into account the extent to which the Licensee has acted with due diligence in its identification and management of relevant risks. We provide further details on our approach to investigations in our Enforcement Policy (see volume four).
Better aligning incentives between Licensee and Good Causes
5.14: A more outcomes-focused approach provides greater scope for the Licensee to explore and pursue different approaches to achieving a given outcome. However, it is critical this greater flexibility sits within an appropriate framework of incentives and accountability. Key to this is aligning the Licensee’s incentives with Good Causes.
5.15: This alignment has been key to our approach to developing the Incentive Mechanism set out in Schedule 5 of the Fourth Licence. The Incentive Mechanism determines how much money generated from sales of National Lottery tickets is paid to Good Causes, with the remainder available to cover the Licensee’s costs and, where applicable, to provide a source of profit. We have sought to ensure the alignment continues to be achieved irrespective of changes that may arise during the Term of the Fourth Licence, including for example in relation to the range and mix of Games provided, and the relative intensity of play.
5.16: In line with our statutory duties, we consider it important that improvements in performance, with respect to Good Causes, are not generated in ways that undermine propriety or the protection of Participant interests. The Licensee must have and apply appropriate and proportionate policies, processes and procedures for identifying, mitigating and managing the risks of harm (in line with the comments above), and must adjust its conduct where appropriate to address and/or guard against this risk.
5.17: An important feature of the Incentive Mechanism is that the allowable costs of operating the National Lottery are shared between the Licensee and Good Causes (through the application of the proportion of Surplus). This provides a framework that supports an appropriate alignment of incentives and is conducive to the provision of Participant protection that is effective, proportionate and cost efficient.
Providing greater flexibility for the Licensee
5.18: At the core of our Fourth Licence approach is a focus on the outcomes that the Licensee achieves, rather than how these are achieved. Our Regulatory Model allows the Licensee to pursue innovation opportunities that deliver better outcomes for Good Causes and Participants.
5.19: By providing a greater degree of autonomy and flexibility, we want the Licensee to take ownership of the development and delivery of its plans. While we aim to give flexibility, this is subject to the Licensee being able to demonstrate that it has appropriate policies, processes and procedures for identifying, mitigating and managing relevant risks. Where there is evidence to suggest a material degree of residual risk, we will consider whether additional oversight is appropriate to safeguard the delivery of our statutory duties.
5.20: In line with this, we make use of non-prescriptive and flexible Fourth Licence conditions where possible. The use of these outcomes-focused requirements provides the opportunity for the Licensee to develop approaches to compliance that are appropriate to its business activities and that avoid unnecessary restrictions and/or standardisation. Supporting this, the Fourth Licence includes a requirement that the Licensee must comply with Best Practice9 rather than referring to specified regulatory standards or guidance10.
5.21: An important part of the more flexible approach is the extent to which the Licensee is permitted to make changes to its business activities without seeking our approval.
5.22: The Licensee still needs to obtain our approval before launching and/or promoting new Games or Game changes during the Fourth Licence (that are not covered by its existing Section 6 Licences)11. However, we limit the scope of the approvals process as follows:
As a matter of course, we do not intend to assess in detail the commercial merits or otherwise of proposals, and instead we intend to focus on the extent to which Game change proposals, or proposals for the launch of new Games, may entail risks for Participant protection and propriety, and/or any harm to the National Lottery Brand and reputation.
Subject to receiving appropriate evidence and assurance in relation to the above risks, we intend to provide a streamlined and timely process for the approval of Games or the relevant Game changes, in order to facilitate Licensee innovation for the benefit of Participants and Good Causes.
5.23: Similarly, there are other limited instances specified in the Fourth Licence where the Licensee must obtain our consent or approval before taking certain specified action. In such cases we intend to consent or approve in a timely fashion to avoid restricting Licensee flexibility, subject to receiving any clarifications or assurance that may be necessary in order for us to fulfil our role and duties as a regulator.
Increasing Licensee ownership over its performance
5.24: As explained above, the provision of more Licensee autonomy and flexibility over how to run the National Lottery is central to our Regulatory Model. However, our role and duties as a regulator require that, whilst providing more flexibility and autonomy to the Licensee, we continue to ensure the Licensee’s compliance with Fourth Licence obligations, which are aligned to positive outcomes for Participants and Good Causes.
5.25: We assign a greater degree of ownership of, and accountability for, compliance to the Licensee. This goes hand-in-hand with reducing our direct involvement in commercial and operational decisions. Under this approach, the Licensee is less reliant on our approval and instead takes a greater degree of ownership for its decisions, including being able to demonstrate it has followed appropriate processes to consider and mitigate compliance risks. We expect to have an effective regulatory relationship with the Licensee which facilitates this, and which supports the delivery of the obligations under the Fourth Licence.
5.26: In practice, increased Licensee ownership is formalised through requirements to provide us with assurance of compliance with the Fourth Licence, including through an Annual Assurance Statement which has been certified as approved by the Licensee’s board of Directors. Guidance on these requirements is set out in our Assurance and Regulatory Reporting Requirements (see volume three), which also covers the core set of reporting information required.
5.27: As part of assigning ownership of performance and delivery to the Licensee, where appropriate, the Licensee will have the opportunity to determine how best to address any performance issues (identified either by the Licensee or by us), rather than requiring the Licensee to follow a remedial course of action determined by us.
5.28: Nevertheless, our regulatory approach does encompass the use of robust interventions where performance issues are particularly material or persistent. This includes various formal and informal enforcement tools that we may apply in line with our principles of proportionality, consistency, evidence-based decision making, accountability and transparency, as set out in our Enforcement Policy (see volume four).
5.29: Therefore, notwithstanding the greater ownership of performance and delivery by the Licensee, there may be specific instances where our role and duties as a regulator require us to intervene.
8 The Monitoring Performance Framework includes further guidance on our expectations around "do everything it can" obligations in the Fourth Licence and how these differ from the more prescriptive conditions.
9 Condition 4.3 defines Best Practice as the standard to be expected of an experienced and professional person doing a particular thing and seeking to secure the outcomes in Condition 1.2.
10 For example, certain standards relating to technology and security that were specified in the Third Licence have not been referenced in the Fourth Licence.
11 See separate guidance on the Section 6 licensing process for more detail.
4. Our development of the Fourth Licence approach
Last updated: 8 February 2024
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