Keeping up with the Regulators

Malta’s proposed gaming law overhaul: Key changes and challenges

The consultation document published on 12 July 2017 (“Consultation Paper”) by the Malta Gaming Authority (“MGA”) together with a draft of the proposed new Gaming Act and several regulations to be made under it (“Draft Law”) is the first welcome and publicly visible step in the process of consolidation, rationalisation and future proofing of Malta’s gaming laws.

A quick read through the Consultation Paper and the Draft Law makes it immediately apparent that this is no piece meal process: Malta is seeking to leverage the strengths of its existing regulations, its position as a leading regulator of remote gaming and its experience in regulating gaming, both land based and remote, in order to come up with a system of regulation that is at the forefront of current thinking in this area. Even though it is not expressly set out in the Consultation Paper, we can read between the lines that the MGA hopes that this “overhaul” will further enshrine the MGA’s position as a leading regulator of the sector and Malta as the standard bearer when it comes to regulating the gaming industry, both gambling and skill games.

James Scicluna, Partner, WH Partners

James Scicluna, Partner, WH Partners

Undoubtedly, a lot will be said and written about the Consultation Paper and the Draft Law, well beyond the consultation period, which closes on 23 August 2017.

In this note we focus on some of the proposed changes which we think will have an impact on remote gaming operators and their key suppliers.

  • A principled approach with clear objectives

The introduction of regulatory objectives and principles in the law itself serves as important guidance to regulator and operator alike, both in the interpretation of the law and in its application. The importance of these principles and objectives, to which the Consultation Paper makes ample reference, should not be underestimated when it comes to actual operations, decisions or rulings. They are likely to serve as somewhat of a guiding light to the regulator, operators and courts alike.

  • A more streamlined licensing procedure

One of the major changes in the Draft Law when compared to the current regulations is the shift from multiple licence types to a simplified system with two types of licence: business-to-business (“B2B”) and/or business-to-consumer (“B2C”) licences, both for remote and land-based businesses.

Whereas remote gaming operators currently require a licence per product, per supplier, resulting in duplicate procedures, the Draft Law would reduce the requirement to one licence for all products and segments in each principal type of business activity, i.e. B2B or B2C.

Additional product-specific and segment-specific authorisations will only be required when justified by regulatory concerns and using a risk-based approach. For example, under the proposed new system a B2C remote gaming operator would be able to integrate and launch games provided to it by an MGA licensed B2B operator without the need for any further licences or authorisations. This is likely to free up resources at the MGA which could then be allocated to ongoing monitoring of licensees. It will make it much quicker for products to be added to operators’ offering without losing out on regulatory compliance on the game side.

It is quite refreshing to read a consultation published by a regulator which, while seeking to implement measures to improve supervision is also concerned about operators’ “time to market” and their competitiveness. It is undisputable that Malta licensees do not operate in a vacuum, they have competitors in Gibraltar, the Isle of Man, Curaçao and elsewhere. The initiative to make adding games less complex without losing out on regulatory oversight should be welcomed.

The convergence and simplification of all regulated gaming activity, both online and offline, under two categories of licences of course also means changes in the licensing process, different administrative fees and taxes. The MGA will take centre stage when it comes to rolling out and implementing new licensing procedures. Failure is not an option. It will have to deliver, living up to industry expectations, applying in practice the ethos of the Draft Law.

  • A longer licence term

The Draft Law proposes that licences issued by the MGA would no longer be for a 5-year period, but would be extended to 10 years. This longer licence term immediately adds value to each licensee’s business whilst reducing licence renewal bureaucracy. Our view is that this is pretty much a gift to the industry but it is likely that gift will come hand in hand with stricter ongoing monitoring of licensee operations. Our view is that this too benefits licensees, in particular all of those which have made significant investments in their compliance functions, taking advice ahead of regulatory developments as they go along in order to implement and apply proper internal compliance procedures.

  • DR licences

The Consultation Paper refers to and the Draft Law provides for a “limited duration” licence, which seems to be a licence intended to be activated for brief periods of time, up to four times year. On paper this is ideal for use in a disaster recovery (“DR”) scenario. Unlike the DR regulations in the Isle of Man, which allow an operator to go-live from that territory for DR purposes without requiring a local licence, Malta will require a licence, albeit not a “full-blown” B2C or B2B licence in order to activate DR from Malta. The requirement of a licence is due to the need which the MGA feels it should have on operations from Maltese territory and should be of comfort to operators, as should operating DR from an EU territory.

  • New licensable activities

To those with an in depth understanding of the industry it will seem only natural that the MGA is proposing that key supplies to B2C operators should now be licensed. One such type of supply is that of gaming software, including gaming platforms, which to date is not licensable per se unless the provider also hosts and manages games. It will be key for suppliers of this industry to take proper advice on whether their activities are likely to become licensable. The MGA envisages lighter-touch type licensing for supplies which aren’t critical to the gaming transaction. However, supplies which are critical, such as gaming platforms, will be very closely scrutinised. After all, it is through these platform which entire gaming operations are managed.

The MGA is putting its full weight behind making a number of key functions within operators licensable. Under the RGR, and practice over the past 15 years, the Key Official developed into the be all and end all of compliance for Malta licensed operators, but that doesn’t always mirror reality. The system being proposed is very similar to that which applies in the UK where the persons responsible for the overall management and provision of the gaming service, marketing, finance, compliance and IT all require a personal licence. We believe that licensing other key functions is definitely a step in the right direction. It should be welcomed by operators and other key stakeholders. It is a step towards building more trust between operator and regulator as well as greater transparency. Though not each of the persons authorised to perform key functions will be a principal point of contact for the MGA, the MGA will be able to reach out directly and hold each of these persons to account in respect of their individual area of responsibility.

  • Skill games

Skill games were formally regulated in Malta by means of the Skill Games Regulations of 2016 (“Skill Regs”), which came into force on 24 January 2017. The Skill Regs currently govern the provision of certain games of skill in or from Malta. Malta has recognized that several games, including fantasy sports, the outcome of which is based predominantly but not solely on skill, vary substantially both from pure skill games such as say chess, but also from games of chance. The Draft Law embodies this approach and will supersede these Regulations whilst providing continuity of approach. In other words, providers of Fantasy Sports and other types of skill games are largely not affected by the Draft Law. Still, a gap analysis between the current position and that under the Draft Act should be undertaken by operators and suppliers in this area to ensure ongoing compliance.

  • New fiscal obligations

Gaming Tax

As the law currently stands, different gaming sectors in Malta are subject to widely different taxation. The need was felt for a regulatory framework which streamlines taxation. The Draft Law, more specifically the new ‘Gaming Tax Regulations’, introduces a new taxation model, under which the payment of a fixed fee (e.g. under Class 1 licences issued under the RGR) will be abolished, as will taxing turnover (e.g. under Class 2 licences issued under the RGR) and a new structure is introduced.

The removal of gaming tax on B2B licences, whether remote or land-based, is a fundamental new concept which will be no doubt welcomed by providers of games, game platforms and of other licensable B2B activities. The reasoning behind this is that generally, providers of critical supplies share revenues generated by B2C operators using their services, and hence the relevant tax payable on that specific revenue would have already been subject to tax.

With respect to B2C operators, the Draft Law provides a shift to the point of consumption model in respect of gaming services offered by remote means. Under the current regime, gaming operators located in Malta and having an international presence, have to pay both gaming tax under Maltese law, as well as any gaming tax and additional indirect taxes imposed by the jurisdiction where the customer is located. Transforming such regime into one that imposes taxation at point of consumption resolves this double tax issue.

The Draft Law proposes that, unless otherwise exempt, all operators of licensable gaming services should pay gaming tax amounting to 5% of the gaming revenue derived from end customers located in Malta only, whether the customer is playing from a land-based casino, a gaming parlour, a bingo hall, or remotely.

In terms of the Draft Law, gaming revenue is based on the aggregate stakes and wagers, including any bonus or other player incentives, less an amount to be determined by summing up the aggregate player winnings to the aggregate of any bonus or other player incentives. Where applicable, the term “aggregate stakes and wagers” also includes tournament fees and other similar elements of revenue and charge.

Moreover, the Draft Law has also introduced a gaming levy which is to be paid by operators of gaming devices, including slot machines, gaming tables or tickets located or sold in gaming premises. The levy on gaming devices payable in each and every tax period by reference to gaming devices deployed in the provision of Type 1, Type 2, Type 3 or Type 4 gaming services shall be determined in the manner stipulated in the below table by reference to the aggregate gaming revenue generated during the tax period from all gaming devices deployed by that person in the provision of Type 1, Type 2, Type 3 and Type 4 gaming services:

Type 1 gaming services  games of chance played against the house, the outcome of which is determined by a random generator, and shall include casino type games, including roulette, blackjack, baccarat, poker played against the house, lotteries, secondary lotteries and virtual sports games; and/or

Type 2 gaming services  games of chance played against the house, the outcome of which is not generated randomly, but is determined by the result of an event or competition extraneous to a game of chance, and whereby the operator manages his or her own risk by managing the odds offered to the player (e.g. fixed-odds betting); and/or

Type 3 gaming services  games of chance not played against the house and wherein the operator is not exposed to gaming risk, but generates revenue by taking a commission or other charge based on the stakes or the prize, and shall include player vs. player games such as poker, bingo, betting exchange and other commission based games; and/or

Type 4 gaming services  controlled skill games (e.g. fantasy sports).

Table 1 – Levy on Gaming Devices

Cumulative gaming revenue for the tax period

Applicable Rate

For every euro of the first €500,000

14%

For every euro of the next €1,000,000

20%

For every euro of the next €1,500,000

26%

For every euro of the next €2,000,000

32%

For every euro of the next €7,500,000

34%

For every euro of the next €12,500,000

36%

For every euro of the remainder

38%

Licence and Administrative Fees

The Draft Law completely changes the manner in which licence fees are to be calculated, introducing the concept of a two-tier licence fee, namely consisting of both fixed and variable components. Fees will vary based on a licensee’s revenues. We wonder why the MGA has chosen to integrate what is currently considered as tax into licence fees.

The fixed component involves the payment of a licence fee of €25,000 due every 12 months, in advance, whilst the variable component is dependent on the gaming revenue generated under the licence itself. The variable licence fee is payable monthly (before the expiration of the 20th day of the month commencing immediately after the month in which the licence period commences).

The below tables shows the variable licence fee payable by each Type of gaming services (please refer to a description of the 4 types of gaming services on page 6):

Part A – Type 1 gaming services (casinos, lotteries, virtual sports games)

Variable Licence Fee for the Licence Period

Amount

Where Gaming Revenue does not exceed €1,000,000

€12,000

Where Gaming Revenue does not exceed €5,000,000

€54,000

Where Gaming Revenue does not exceed €10,000,000

€120,000

Where Gaming Revenue does not exceed €20,000,000

€210,000

Where Gaming Revenue does not exceed €45,000,000

€330,000

Where Gaming Revenue does not exceed €75,000,000

€480,000

Where Gaming Revenue exceeds €75,000,000

€660,000

Part B – Type 2 gaming services (fixed-odds betting)

Variable Licence Fee for the Licence Period

Rate

For every euro of the first €3,000,000

4%

For every euro of the next €4,500,000

3%

For every euro of the next €5,000,000

2%

For every euro of the next €7,500,000

1%

For every euro of the next €10,000,000

0.8%

For every euro of the next €10,000,000

0.6%

For every euro of the remainder

0.4%

Part C – Type 3 gaming services (bingo, poker, betting exchange)

Variable Licence Fee for the Licence Period

Rate

For every euro of the first €2,000,000

4%

For every euro of the next €3,000,000

3%

For every euro of the next €5,000,000

2%

For every euro of the next €5,000,000

1%

For every euro of the next €5,000,000

0.8%

For every euro of the next €10,000,000

0.6%

For every euro of the remainder

0.4%

Part D – Type 4 gaming services (fantasy sports)

Variable Licence Fee for the Licence Period

Rate

For every euro of the first €2,000,000

0.5%

For every euro of the next €3,000,000

0.75%

For every euro of the next €5,000,000

1%

For every euro of the next €5,000,000

1.25%

For every euro of the next €5,000,000

1.5%

For every euro of the next €10,000,000

1.75%

For every euro of the remainder

2%

Operators would do well to take advice and examine what impact this will have on them based on past and forecast future revenues.

A moratorium on licence fees is being proposed for start-ups.

Game providers are also subject to a yearly licence fee ranging from €25,000 to €35,000, depending on the revenue generated by the provider, whilst providers of back-end services, or a control system whereby significant regulatory data is captured, stored or processed shall be subject to a fee ranging between €3,000 and €5,000 per year.

Other Administrative Fees

Under the Draft Law the MGA will also have the power to levy administrative fees which include:

 

Administrative Fee

One-time, non-refundable licence application fee

€5,000

One-time, non-refundable licence renewal fee

€5,000

One-time, non-refundable licence application fee for a limited duration licence

€500

Maintenance fee for a holder of a limited duration licence

€50 per day whilst the licence is in effect

Request for the approval of a new gaming device

€100 per device

One-time, non-refundable material supply certificate application fee

€1,000

Maintenance fee for a holder of a material supply certificate, payable yearly in advance

€500

One-time, non-refundable Junket Leader approval application fee

€50

Recognition Notice fee, payable yearly in advance

€5,000

One-time, non-refundable Key Function approval application fee

€50

One-time, non-refundable Low Risk Games Permit application fee for non-profit games

€25

One-time, non-refundable Low Risk Games Permit application fee for commercial communication games

€25 or 0.5% of the total monetary or retail value of the prize, whichever is higher.

 

  • Operator Compliance and Monitoring by the MGA

The Draft Law grants the MGA extended monitoring and enforcement powers. Going forward greater emphasis will be placed on ongoing and transparent access by the MGA to operators’ regulatory data.

  • Administrative Review

The introduction of a clear administrative review procedure is a key tool in the rights granted to applicants for licences and licensees alike in order to challenge any decision of the MGA which they deem to be wrong or unfair. It is likely that a natural consequence of this will be greater pressure on the MGA to justify its decisions more transparently.

  • Player support

The MGA considers that it should enhance its role in assisting players which have disputes with the MGA’s licensees. Whilst this may be of comfort to players, we accept that it is open to argument whether or not this function – which the MGA already performs – is proper to a regulator where the dispute is purely one of private law.

  • Transitory provisions

The Draft Law envisages a smooth transition in order that pending applications, ongoing audits, and current licensees might transition seamlessly to fully operating under the new law.

  • A few final observations

By some accounts, the Gaming industry in Malta contributes up to 12% of Malta’s the Gross Domestic Product and over 6,000 direct jobs. With this in mind, the overhaul of Maltese Gaming law must be a success. The overarching idea, which it seems to us has been largely achieved by the Draft Law, was to modernise and consolidate this sector’s regulatory framework in one Act of Parliament.

The consultation period which opened on 12 July 2017 is fundamental for industry and other stakeholders to express their views on the Draft Law. It is important that they do so. The MGA will welcome robust feedback. It is right for it – and the government – to listen attentively to what results from this consultation period, even though extensive consultation has already taken place with several key stakeholders during the design of the Draft Law. Finally it will be Parliament which will have the last say on the Act. Gaming is an industry on which there has been broad consensus in Malta for several years. We expect, and indeed hope, that on this occasion Maltese parliamentarians will once again show that they are able to agree on the best way forward for the gaming industry based on informed discussion and analysis.

About the authors:

James Scicluna is a co-founder and partner of WH Partners. He is a Solicitor in the UK and an Advocate in Malta. Tiffany Farrugia is a Trainee Lawyer within WH Partners’ Gaming practice.

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