Gaming Education Month CoverageIn the years leading up to the 2008 financial crisis, investment banks engaged in careless trading of complex derivatives. Their incentives prioritized short-term gains over long-term stability. Neither government regulators nor self-regulatory organizations were equipped to foresee or mitigate the impending disaster.
But when the crisis hit, it was the public that suffered most, not the banks, the rating agencies or the regulators. The core issue was a misalignment of incentives: Banks were motivated to take enormous risks without bearing the full consequences of their actions. As long as they met their narrow regulatory obligations, they were free to trade securities without due concern for the systemic risk they were creating for the entire industry.
In much the same way, risk is piling up in the gambling industry. Today, we continue to see expansion of gambling products and markets, but there has been little meaningful innovation in responsible gambling since self-exclusion programs were invented in 1989. We see large and successful gaming companies grow in non-core business areas like anti-money laundering (AML), payment processing and location services, but just about every responsible gambling company I observe cannot seem to grow beyond a niche business.
For an issue that is clearly the biggest barrier to new markets and new opportunities, this lack of progress is paradoxical and needs fixing.
Regulation and Self-Regulation
To address the problems created by gambling harms there are often calls for, and efforts towards, voluntary self-regulation efforts. Of course, these plans should be lauded. We want more good actors in the industry and new programs like the American Gaming Association’s responsible marketing code. However, with the current regulatory model, the game theory among operators still seems to lead us down a less than ideal path. If one operator pulls back on a potentially harmful strategy, it creates an opportunity for another to deploy it. Of course, that’s a bit of an oversimplification, but the broader point is that even if individual firms act in the public interest, as a whole, the gambling industry has little incentive to prioritize public welfare.
Of course, we have regulators to step into the market when self-regulation fails. However, much like the gaps in oversight and enforcement in pre-2009 financial markets, most regulatory efforts in the gambling industry are compliance-based and do not target “systemic” risks.
Today, a “best-in-class” responsible gambling program will require features like warning labels, limit-setting tools and other rules to follow, but they have little impact in encouraging investment in responsible gambling innovation. We see this even in relatively progressive markets. In my research on third-party certification programs in Canada, I found that they led to short-term performance gains but were not a source of ongoing and consistent improvement by operators over time.
From Compliance to Incentives
To address this issue, regulators need to align incentives through two key practices: punishment for bad behavior and rewards for good behavior.
The most familiar route to ensure operators act in the public good is through stiff penalties for violations. Regulators can be clear about expectations to support (and not exploit) consumers through both laws and norms, and they can levy substantial penalties for negligent and harmful activity. The decision to levy a penalty and the scale of punishment is an inherently subjective activity, but as “case law” continues to develop, the process can become more rigorous and predictable.
Over the past few years, the U.K. Gambling Commission (UKGC) has become increasingly proactive in fining operators for failing to comply with responsible gambling (RG) and AML expectations. Fines not only create immediate financial and consequences for firms, but they also bring public attention to the issue of responsible gambling, thereby pressuring other firms to pre-emptively improve their practices.
In my own experience, I never saw RG-related reforms occur as quickly inside of firms as when the UKGC changed their approach. Early findings suggest that the approaches to reforming AML have had positive effects throughout the industry.
A much less practiced approach to align the interests of gambling operators with the public good is to reward operators for responsible conduct. This is a more complicated system to create, but potentially much more powerful. Do we just give tax breaks for donating to responsible gambling research? No, that will just lead to seeing more professors at your local country club. If the public is going to give a tax break to operators, they need to get something back for those dollars: meaningful outcomes on key measures of harm.
There are many ways to make this work, but this could take the form of standardized quarterly surveys of players to quantify whether there were improvements in the share of consumers that are positive players. Alternatively, there could be an annual study to estimate the share of revenue that comes from patrons with gambling disorders. The scale of tax cuts can be balanced against estimates of offset harm. This approach is not an easy lift, but it does lead us in the direction of continual improvement, both in focusing on interventions that work and discarding policies that are a drain on resources.
A Need for Progress
The 2008 financial crisis taught us that without effective regulation, institutions, be they financial or gaming, may take risks that put the larger public in jeopardy. Implementing a regulatory framework that rebalances compliance strategies against incentive strategies can realign these lopsided practices and make the gambling industry a fairer, more responsible marketplace.
Realigning incentives is not an overnight change, but it seems necessary to move forward as we have seen little innovation in the 34 years since self-exclusion was invented. Regulatory bodies need to look beyond rules and consider methods that directly influence the industry’s conduct.
