Do we really need government to save us from ourselves? It used to be that ministers concerned themselves with ensuring national security and sound money. Unfortunately, that view of limited government seems to have gone out the window. Instead, the heavy hand of Whitehall during the pandemic has given way to a further bout of paternalism.
Why does this matter? Well, a determinedly interventionist stance by regulators, whether in relation to the drink and tobacco industries, or any other part of the economy deemed to have negative social consequences, presents an unpredictable (and growing) risk factor for investors.
We were recently given a reminder of the government’s interest in our welfare in a trading update from Entain (ENT), owner of the Coral and Ladbrokes brands. The gambling group’s share price clicked into reverse when it revealed that online net gaming revenue (NGR) had seen mixed volumes across the group, “but in aggregate, softer than anticipated”. Consequently, NGR growth for the third quarter is “expected to be up high single-digit per cent, and down high single-digit per cent on a pro-forma basis”.
The pro-forma decline was brought about by a range of factors, including slower-than-expected growth in Australia and Italy. But Entain did point out that BetMGM in the US is on track to deliver positive cash profits in the second half of the year. The 50-50 joint venture is seen as a critical growth engine of the group, underlining the growing importance of the US market to the gaming industry.
Regulatory headwinds
Third-quarter performance wasn’t helped by a series of “adverse sporting results”, which weighed on margins, but management also put the blame on “implementation of industry-leading safer gambling measures and ongoing regulatory headwinds persisting longer than expected, particularly in the UK”.
Earlier this year, the government set out a range of measures in a White Paper that represent the most striking reforms to the betting industry since the Gambling Act was introduced in 2005. Affordability checks and online slot stake limits are covered under the reforms, but the industry will also be asked to pay a levy that supports organisations that offer treatment services for problem gamblers. That should boost NHS coffers at a time when the service is seeing a steep rise in related referrals amid the usual clinical backlogs.
The UK government has brought forward the proposals principally in response to the spread of betting on smartphones and other digital channels – the gambling landscape has evolved significantly. But critics of the industry, or at least those critical of offshore gambling operators, point to the paucity of the contribution to the wider economy, as exemplified by relatively low employment rates, short supply lines and a limited multiplier effect.
Fair enough, but the direct fiscal benefit to HMRC comes in at around £3.5bn a year, according to analysis from the National Institute of Economic and Social Research. To put that into perspective, tobacco duty receipts reached £10.2bn and £10.0bn in 2021-22 and 2022-23, respectively, while alcohol duties are expected to raise £12.7bn over the latter period.
One imagines that the Exchequer would be loath to give up those receipts whatever the societal ills. But a puritanical streak appears to hold sway in Whitehall. Over 2022-23, the Gambling Commission took enforcement action against a total of 24 operators for breaching regulatory requirements, including respective fines of £19.2mn and £17mn levied on William Hill Group and Entain for social responsibility and anti-money-laundering failures.
It is curious that, while the government is making all the right noises about attracting foreign direct investment and re-establishing London as a preferred destination for initial public offerings, its various agencies, nominally independent or otherwise, show few signs of curtailing regulatory and enforcement changes, part of the reason why UK capital markets have lost their allure.
Some might argue that the Financial Conduct Authority (FCA) provides a case in point. The body has faced criticism over its supervision of the debt market and its hand-in-glove relationship with the banking sector. It recently faced pushback over a hastily released report in response to the Nigel Farage/Coutts banking controversy. The report claimed that there was no evidence of Britons being de-banked due to political reasons even though it didn’t reference the original controversy. The criticism fed into the alternative narrative that the FCA now has more in common with an advocacy group rather than an organisation primarily concerned with financial probity. On a range of issues under the environmental, social and governance banner, the FCA seems determined to drive bureaucracy and costs for business at a time when UK public markets badly need a shot in the arm.