This article establishes some not-so-universal definitions and analyses some inherent aspects, positive and negative points for approaching markets that are going through a period of transition. Readers will also find here specific models of greater and lesser success, and some practical measures to provide answers to this issue. With Brazil, Peru, and Chile still lagging as examples in South America, the transition from an unregulated to regulated market is an extremely relevant topic.
THE TRANSITION PERIOD AND ITS DEFINITIONS
The first definition we may want to look at is the meaning of a “transitional period” itself. For the purpose of this article, we will define it as “the period during which a market changes from an unregulated to a regulated status.” We will consider an unregulated market to be one where local license have not yet been issued to private operators. As regulated, we are going to focalize on markets that allow, either at all times or via licensing windows, private operators to apply for and receive a license to operate at least one form of online gambling, and such a license has been issued. It is worth noting that some markets may be regulated for one product and unregulated for another. For example, in the Republic of Ireland, online sports betting is regulated but online casino games are unregulated.
In our opinion, a transitional period begins from the moment a government clearly indicates its intention to regulate a market. An alternative view is that a transitional period only begins from the date a firm legislative step is taken, such as the publication of a draft law. However, for an operator/supplier looking to avoid an unsuccessful transitional period, then the publication of a draft law may be too late to avoid problems. There are usually some inherent problems with transitional periods:
a. Incumbents. In many transitional markets, were are already existing actors, usually some state or ex-state monopolies may look to block or make the transition difficult for private operators. These parties may hold local political or media power.
b. Litigation/Enforcement. While a market is transitioning from unregulated to regulated, operators (and suppliers/affiliates) active in such markets may have received cease and desist letters from local regulators and/or have been involved in court litigation with the government or incumbents in the market and/or having their websites blocked/blacklisted.
c. Perception by the government or regulator. Despite legal arguments, and the intention of operators to apply for a local license once available, some local governments/regulators may have a negative perception of operators active in the market before or during a transitional period.
POSITIVE AND NEGATIVE ASPECTS OF THE TRANSITION TO A REGULATED MARKET
There are many positive points to the change to a regulated market and the following are all important when navigating a transitional period:
a. Economic. One motivation for a government to move to a regulated market is the collection of gambling taxes, license fees as well as the wider economic benefit driven by local jobs and local investments.
b. Social and Safeguarding. Another strong motivation is bringing operators/suppliers under local rules and regulations, and also increasing understanding of the sector through direct licensing and engagement with operators, suppliers and trade associations.
c. Sports and Sports Integrity. In general, regulating a market will increase investment into sports clubs through sponsorship. However, in some jurisdictions, such as Brazil, sports sponsorships have occurred in the unregulated market. Regulated markets undoubtedly support sports integrity via connected alerting mechanisms and education of professional athletes.
d. Political. All governments wish for their policies to be successful and, generally, if the economic, the social and the sports aspects are successful, then political success can follow. However, this highly depends on the jurisdiction, and other factors, such as prevailing attitudes to gambling and fairness of national press reporting of the sector.
In parallel, we can identify several negative aspects of transitional periods:
a. Bad Actor Clauses. There can be some restrictions which prevent or limit an operator from obtaining a local license for activities while the market is unregulated. This is counter-intuitive since operators looking to receive a license, when they are able to do so, will only increase the number of players channeled to the regulated offer.
b. Blackout Periods. We see blackout periods working in two ways: 1) Pre-regulated market, in which an operator/supplier that has submitted their license application may be required to stop targeting the market via their hub license until their regulated market license is determined, as it happened in Portugal. 2) Post-regulated market, also sometimes called a “cooling-off period,” in which operators that worked in the unregulated market are prevented from entering the market for a period of time. While this can be linked to a bad actor or suitability clause, in these cases, incumbents and completely new market entrants get a head start in the regulated market. The Netherlands is an example of where a cooling-off period was used.
c. Complete Market Block. In some jurisdictions, activities in the unregulated market completely disqualify an operator/supplier from ever applying for a local license in that jurisdiction. Again, The Netherlands provides an example, where subject to certain conditions, some operators were permanently excluded from the market.
d. Timing/Process. Timing, clear application process and regulations and jurisprudence compliance are some important aspects to consider. The UK arguably implemented one of the best examples of a transitional period aspect when it allowed operators that evidenced being licensed by a jurisdiction within the EU or a whitelist jurisdiction to continue operating in the UK until their license had been determined by the Gambling Commission. Ontario is another example where it provided a smooth transition from unregulated to regulated with reasonable timeframes to apply for a license and clear communication of deadlines.
e. Incumbents Exploiting Position/Competition Law issues. In some markets, incumbents have sought to gain a competitive advantage over operators previously working in the regulated market. In France, an incumbent was found to have been abusing its position of influence by enacting anti-competitive business practices following a court action from a private operator.
CHARACTERISTICS OF THE IDEAL TRANSITION PERIOD
In our view, the ideal transitional period is one with the following features:
a. Clarity of information. Operators/suppliers should be given clear enough information about the regulatory regime (at the very least, key elements such as license fees, tax rates, local requirements) in order to make an informed decision about whether to apply for a license. There should also be clarity on when gambling taxes are payable.
b. Transitional Rights/Business Continuity. License candidates that apply within a reasonable time (clearly defined and not less than 6 months from all regime details being published) receive transitional rights to operate under their current license, such as Malta, until the license application has been determined by the regulator. If the regulator needs more information to consider the application, then the transitional rights should remain in place.
c. Process. The application process should be clearly defined, include the elements above and have a reasonable deadline for applications and to gain transitional rights.
PRACTICAL STEPS
We recommend the following practical steps for managing transitional periods:
a. Awareness. Staying aware of the latest developments in key markets with the likelihood of regulating is always the first step.
b. Research. Understand the political, regulatory and market background, and keep a keen focus on the positive and the negative factors regarding transitional periods outlined above.
c. Communication. In most cases, trade associations and joint views of stakeholders are the best way of communicating policy position. If common ground can be found with any incumbents and/or local companies, then this can be very powerful. In jurisdictions that run consultation processes, in almost every case it is beneficial to engage with such a process directly and/or through a trade association.
d. Licensing Preparedness. Being prepared for a license process and managing a smooth licensing process will also help mitigate even the worst transitional periods.
DEFINING THE COMBINATIONS FOR MARKET SUCCESS
Transitional periods characteristics are varied, and it’s in the right mix that success persists. Staying up to date with market developments, understanding the local background with international comparisons, and taking informed business decisions, and effective communication with regulators are all critical. TheRegulationService (TRS) has expertise in regulatory tracking and background, new market entry and license applications. TRS and its network of local lawyers/experts can also help refine regulatory positions and support your market entry, regardless of how a transitional period evolves. Get in touch with TRS to discuss your expansion goals, and how best we can help you.