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  3. Fourth National Lottery Licence: Regulatory Handbook

Policy

Fourth National Lottery Licence: Regulatory Handbook

The Commission’s regulatory handbook sets out our regulatory approach to the National Lottery.

Published
1 February 2024

Last updated
1 February 2024 - Changes

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  1. Contents
  2. Volume four: Enforcement Policy  
  3. 30. Possible regulatory actions

30. Possible regulatory actions

30.1 In this section we summarise the possible outcomes of any formal investigation, based on the principles and processes set out in the previous sections.

30.2 We may decide to take no formal enforcement action. This may involve no further action, or we may instead apply informal procedures (see section 26).

30.3 If we decide to apply formal enforcement action, we have a range of statutory and non-statutory regulatory options we can impose. We include a summary of each of these, and the order we expect to consider them.

30.4 The first action we will consider is whether to issue a notification of Licence breach. If there is a Section 5 or 6 Licence breach this allows us to formally record it without necessarily taking any further action. This outcome may be appropriate where:

  1. there is no risk to the statutory objectives, but a licensing requirement is breached
  2. the breach is not considered serious in light of the factors set out in stage two of our investigation
  3. there is no loss or limited loss Good Causes Contribution (likely to be less than £1000).

30.5 If we consider it appropriate, we will then decide whether to issue other formal enforcement action(s), see examples from the following list 33:

  • undertakings
  • directing the Licensee’s internal audit (see Condition 22.8 of the Fourth Licence)
  • Financial Distress Remediation Plan (see Conditions 18.11 to 18.15 of the Fourth Licence)
  • lock up restrictions (see Condition 18.16 of the Fourth Licence)
  • requirement for an Independent Performance Review (see Condition 25 of the Fourth Licence)
  • imposing new or amended Section 5 or 6 Licence conditions (see Section 8 of the Act)
  • court injunction or interdict or court order (see Section 9 of the Act).

30.6 We will also consider a financial penalty (see Section 10A of the Act) or revoke a Licence (the Act allows us to revoke a Section 5 or 6 Licence if any of the grounds for revocation apply34, including a breach of condition in that Licence). We would only apply this in the most extreme of scenarios and once we had exhausted all other potential interventions. As explained further below, the Act requires us to revoke a Section 5 or Section 6 Licence if we are no longer satisfied that the licensee is a fit and proper person. Therefore, in these circumstances, revocation is the only sanction available to us.

30.7 We next provide more information about each of these.

30.8 Undertakings are a set of actions the Licensee commits to implement. These include an explanation of the events which gave rise to the undertaking, the actions to be taken and the timeline for achieving these. We may also consider an undertaking alongside other sanctions. Although the intention is for an undertaking to be proposed by the Licensee there is no reason to preclude us from taking the initiative.

30.9 We may consider an undertaking to be appropriate where either:

  1. one of the statutory objectives is jeopardised, along with one or more Licensing requirement
  2. one of the statutory objectives is jeopardised and there is public concern, however there is no specific breach of any Licence condition
  3. the overall statutory objectives are not jeopardised, but a Licensing requirement is breached
  4. the breach of Licence and/or effect on statutory objectives can be rectified by way of undertaking
  5. there is no loss or limited loss on Good Causes Contribution (likely to be less than £1000)

30.10 We will only accept an offer for undertaking where we consider it an appropriate enforcement response, and if implemented will achieve an effective outcome. Previous agreement is not a basis for our future acceptance of an undertaking. The success or otherwise of earlier agreements will be a key factor in determining suitability.

30.11 We cannot require the Licensee to enter into an undertaking and there is no requirement for us to accept any offer made. Any failure by the Licensee to implement an undertaking, where there is continued or recurring breach of a Section 5 or 6 Licence condition, will inform our decision whether to impose a financial penalty in respect of that breach.

30.12 We will consider directing the Licensee’s internal audit function (see Condition 22.8 of the Fourth Licence) to review and formally report to us on particular risks or concerns we may have, with a view to getting the Licensee, if required, to strengthen its governance, risk management and controls.

30.13 In the event of the Licensee entering financial distress, evidenced through the occurrence of a Financial Distress Event, we may require the Licensee to prepare, submit to us for review and approval, and implement a Financial Distress Remediation Plan (see Conditions 18.11 to 18.15 of the Fourth Licence) with the objective of returning the Licensee to operational and financial stability and protecting the National Lottery asset.

30.14 The Financial Distress Remediation Plan must set out the steps the Licensee will take to remedy any associated Financial Distress Events, and we may require the Licensee to:

  • amend and improve its plan to our satisfaction
  • report to us on the status of implementation of the plan, at a frequency determined by us, until the Financial Distress Event has been remedied to our satisfaction.

30.15 In the occurrence of a Financial Distress Event for the Licensee, we may consider activating lock up restrictions (see Condition 18.16 of the Fourth Licence), which requires the Licensee to:

  • not pay any dividends or make any other distribution to its shareholders, including the distribution of any tax losses
  • not make any payments under a Related Party Arrangement, other than payments owed under arrangements which are on arm’s length terms and represent Good Value for Good Causes
  • not make any payment to repay any debt, or interest on any debt, owed by the Licensee under any Finance Agreement between the Licensee and a Connected Party.

30.16 We will review the Licensee progress in addressing the relevant Financial Distress Event through its Financial Distress Remediation Plan and inform the Licensee in writing when the lock up restrictions cease to apply.
30.17 We may consider a requirement for an Independent Performance Review (see Condition 25 of the Fourth Licence) is appropriate in any of the following circumstances:

  1. if achieving one of our overall statutory duties is jeopardised, along with one or more Licensing requirement
  2. if achieving our overall statutory duty is not jeopardised but a Licensing requirement is breached
  3. and if we believe an Independent Performance Review will improve our regulatory oversight and help us to understand where problems have arisen with the Licensee.

30.18 If we require an Independent Performance Review, we expect to be involved in determining the associated terms and conditions of the review. The Licensee must not appoint an independent third party without our prior written agreement. The Licensee will have an opportunity to engage and help address any performance issues identified by the review. Any and all costs in connection with the operation of an Independent Performance Review will be at the Licensee’s own cost (it is an excluded cost for the purpose of the Incentive Mechanism set out in Schedule 5 of the Fourth Licence).

30.19 As per Section 8 of the Act, we have the ability to impose new or amended Section 5 or 6 Licence conditions to address a risk to our statutory duties. We may vary, add, or omit any condition 35 without the Licensee’s consent, if the Licensee has been given a reasonable opportunity of making representation. Any amendment we make under Section 8 of the Act would need to be undertaken in accordance with our statutory duties and public law principles. The updated Licence then continues with the additional or amended conditions.

30.20 Conditions 2.4 to 2.6 of the Fourth Licence set out the conditions in the Licence that, per Section 8(3)(b) of the Act, we can only vary with the consent of the Licensee.

30.21 We seek to ensure Participants are not seriously disadvantaged or affected by any new or amended Licence conditions, either directly or indirectly, and that the conditions will protect Participants and the general public during the period they are in force. If we apply this action, we shall serve a notice on the Licensee to inform them about the Licence variation and state the variation shall take effect at the end of such period as may be specified in the notice 36.

30.22 We may consider the imposition of new or amended Licence condition(s) to be appropriate in either of the following circumstances:

  1. if one of our statutory objectives is jeopardised, along with one or more Licensing requirement
  2. if one of the statutory objectives is jeopardised and we consider there is public concern, however, there is no specific breach of any Licence condition
  3. the Licensee has demonstrated understanding and insight of the issues or concerns which gave rise to the review
  4. we consider the risk of repetition to be low
  5. the matter is capable of correction
  6. we can formulate appropriate, realistic and practicable Licence conditions; and
  7. we consider there is no significant risk of repetition if the Licensee complies with the additional Licence conditions.

30.23 We may consider a court injunction or interdict or court order to be appropriate where we seek to compel the Licensee to do or refrain from specific acts. If the Licensee fails to comply with an injunction, they can face criminal or civil penalties. We do not envisage we will use this sanction frequently in the context of enforcement around the National Lottery.

30.24 Under Section 9 of the Act the court may grant an injunction restraining the contravention (or, in Scotland, an interdict prohibiting the contravention) or make an order requiring the Licensee (and any other person who appears to the court to have been party to the contravention) to take such steps as the court may direct to remedy it where the court is satisfied:

  • there is a reasonable likelihood that a person will contravene a condition in a Licence granted under Section 5 or 6 of the Act
  • a person has contravened such a condition and there is a reasonable likelihood the contravention will continue or be repeated
  • a person has contravened such a condition and there are steps that could be taken for remedying the contravention.

30.25 After considering the above sanctions, we may impose a financial penalty if we are satisfied the Licensee has contravened a Section 5 or 6 Licence condition. Our aim of a financial penalty is twofold; to deter persons from contravening conditions in Licences under Section 5 or 6 of the Act, and to eliminate any financial gain/benefit from non-compliance with Licence conditions. Figure 4 shows the high-level process for imposing a financial penalty. We then explain more detail in the following paragraphs.

Overview of process for financial penalties

Step 1: For us to impose a financial penalty the Licensee must have breached a Section 5 or 6 Licence condition. We consider non-statutory sanctions before imposing a financial penalty.

Step 2: We consider the follow elements before deciding to impose a financial penalty:

  • Secretary of State Directions on financial penalties
  • our general enforcement principles
  • information included in this section of our Enforcement Policy.

Step 3: We serve a notice to the Licensee (See section 10A of the Act which details the processes involved for an outcome following Licensee written and oral representation). This notice includes information about the Licence breach, the amount of financial penalty and our reasons for imposing a penalty.

Step 4: Licensee pays the penalty within 21 days, unless the Licensee responds with either of the following actions:

the Licensee makes a written representation

or requests an oral hearing

Step 5: Licensee has a statutory right to legally appeal our decision

30.26 We may consider a financial penalty appropriate in the following circumstances where one of our statutory objectives is jeopardised, along with one or more Licensing requirement and one or more of the following factors are present:

  1. there is a serious impact, or potentially serious impact on the National Lottery’s reputation (including for fairness, consumer protection, systems integrity or customer satisfaction)
  2. there is a significant impact on Participants involved or for potential Participants
  3. there is a significant impact on Good Causes Contribution
  4. the Licensee has derived a financial advantage from the breach
  5. the Licence breach was as a result of deliberate action or negligence
  6. the Licensee was aware or should have been aware of the breach
  7. the Licensee has committed similar contraventions in the past
  8. there was a systematic failure to comply with a Licence condition
  9. the Licensee did not report the issue to us
  10. there is a lack of effective remedial action after the breach or failure becomes apparent to the Licensee
  11. a financial penalty is necessary to deter future contraventions or failures and to encourage compliance, on the part of both the Licensee and other operators.

30.27 We are required by law to act in accordance with Sections 10A and 10B of the Act and the Department for Culture, Media and Sport (DCMS) Director General’s publication statement ‘Financial penalties: principles and procedures’ within the Secretary of State Directions. There are a number of procedural steps we must take before we can impose a financial penalty, as shown in Figure 4, including the service of a notice 37 on the Licensee setting out the details of the breach and giving the Licensee the opportunity to make written representations or to notify us of their intention to make oral representations.

30.28 In certain cases where we are considering a financial penalty, or a payment in lieu of financial penalty, and we receive timely disclosure and admissions by the Licensee, we may seek to give a discount to the penal aspect of a financial penalty.

30.29 Licence revocation (see Section 10 of the Act) is the most serious sanction and we will only consider this in the most extreme of scenarios and once all other potential interventions are exhausted.

30.30 We must revoke a Licence:

  1. granted under Section 5 if we are satisfied the Licensee no longer is, or never was, a fit and proper body to run the National Lottery
  2. granted under Section 6 if we are satisfied the Licensee no longer is, or never was, a fit and proper person to promote lotteries under the Licence
  3. granted under Section 5 or 6 if the Licensee fails to pay the annual fee in accordance with Section 7A of the Act, but we may disapply this if we think that a failure to pay is attributable to administrative error.

30.31 We may revoke a Licence granted under Section 5 or 6 if it appears to us that any of the discretionary grounds for revocation set out in Part I of Schedule 3 of the Act applies38 or the Licensee consents.

30.32 Licence revocation is subject to the process set out in Part II of Schedule 3 of the Act, except where the Licensee consents or has failed to pay the annual fee in accordance with Section 7A of the Act.

References

33 Note the actions are not ranked in order of seriousness, nor do we need to address each one when reaching our decision.

34 See Section 10 and Schedule 3 of the Act. In addition to setting out discretionary grounds for licence revocation, Section 10 of the Act also highlights non-discretionary circumstances where we must revoke a licence.

35 There are two exceptions where we cannot vary existing conditions in the Licence, and these are set out at Section 8(3) of the Act. These are (a) where the variation would result in a condition requiring the Licensee to transfer any property or rights, or (b) in the case of a Licence granted under Section 5 of the Act, in relation to a condition that the Licence provides may only be varied with the consent of the Licensee.

36 Under Section 8(5) of the Act the period specified in the notice shall be a period of at least 21 days beginning with the date of the notice.

37 Sections 10A(3) and (4) set out what we are required to include in the notice.

38 Part I of Schedule 3 of the Act states the following are discretionary grounds for revocation:

“1. A Condition in the licence has been contravened.

  1. Any information given by the licensee to the Director General—
  1. in or in connection with the application for the licence
  2. in pursuance of a Condition in the licence, or
  3. in making representations under Section 8(2) or Part II of this Schedule
  4. was false in a material particular.
  1. (1) A proposal for a voluntary arrangement under Part I of the Insolvency Act 1986 or Part II of the Insolvency (Northern Ireland) Order 1989 has been made in relation to the licensee.

(2) A petition for an administration order to be made in respect of the licensee or for the winding up of the licensee has been presented to the court.

(3) A resolution for the voluntary winding up of the licensee has been passed.

(4) A receiver or manager of the whole or any part of the licensee’s property has been appointed.

(5) An administration application has been made or a notice of intention to appoint an administrator or a notice of an appointment of an administrator under paragraph 14 or 22 of Schedule B1 to the Insolvency Act 1986 (c. 45) has been filed.

  1. In the case of a licence granted under Section 5

(a) the licensee is not providing or proposing to provide facilities that are necessary or desirable for running the National Lottery

(b) any person who is managing the business or any part of the business of running the National Lottery under the licence is not a fit and proper person to do so

(c) any person for whose benefit that business is carried on is not a fit and proper person to benefit from it.

  1. In the case of a licence granted under Section 6—
  1. the licensee is not taking or proposing to take steps that are necessary or desirable for preventing the commission of fraud by participants in any lottery promoted under the licence
  2. a person who is managing the business or any part of the business of promoting lotteries under the licence is not a fit and proper person to do so
  3. a person for whose benefit that business is carried on is not a fit and proper person to benefit from it.”
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31. Regulatory settlements
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