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09 OCT 2012

The Health Lottery - good causes and licensing loopholes

The Health Lottery has courted controversy since its launch earlier this year. The greatest interest for public lawyers, however, comes from the recent legal challenge to The Health Lottery by its rival, The National Lottery. R (on the application of Camelot UK Lotteries Ltd) v The Gambling Commission [2012] EWHC 2391 (Admin) provides an interesting insight into the methods The Health Lottery used to get around gambling restrictions designed to restrict profit-making lotteries, the construction of the Gambling Act 2005 and the manner in which the Gambling Commission is required to carry out its duties.

Section 19 of the 2005 Act stipulates that a lottery cannot be carried out for private gain. Under section 98, it is a mandatory condition of a lottery licence that proceeds do not exceed £4m. The minimum amount of the proceeds of a lottery which must go to good causes is 20%, and the remainder of the proceeds will be divided up between the society which operates the lottery, and any external lottery manager (ELM). It is for these parties to decide how to split the remaining 80%, and managing lotteries externally can be a lucrative business. The Gambling Commission has recognised that the Gambling Act 2005 (the 2005 Act) did not foresee an ELM setting-up societies to operate in such a way that it would make a profit, as The Health Lottery ELM had done. The Health Lottery does not deny that the structure it has initiated seeks to exploit a loophole and avoid the financial limit on society lotteries.

The Health Lottery ELM Limited (the first interested party) promotes a scheme referred to commonly as The Health Lottery. The Health Lottery is in fact constituted of 51 separate regional lotteries, run by Community Interest Companies set-up under the Companies (Audit, Investigations and Community Enterprise) Act 2004. CICs are intended to use their assets, income and profits for community benefit, and as such are subject to an ‘asset lock' which restricts their ability to transfer assets and pay dividends to bodies other than CICs and charities. Each weekly lottery is promoted by a CIC until it has sold tickets to a value of £1m, at which point another of the CICs will take over promotion. This keeps the CIC safely within the requirements that a non-commercial society operating a lottery must not have proceeds exceeding £4m. A percentage of the proceeds raised by the CICs are transferred to a charity called the People's Health Trust, which distributes them to projects and schemes chosen by the CIC and within the region that CIC represents. At the hearing held by the Commission to determine applications to licence these arrangements, those running the scheme were warned that its compliance with the Gambling Act 2005 was finely balanced, and were encouraged to ensure that the scheme operated as a number of distinct lotteries, rather than a de facto single lottery.

Before Lord Justice Stanley Burnton and Mr Justice Parker, Camelot argued that the CICs had been established with the purpose of creating private gain for the ELM, and as such were not non-commercial societies and breached section 19 of the 2005 Act. It claimed that their licences should not have been granted and should now be revoked, or that at the very least the Gambling Commission should review the issue. Camelot also argued that the Health Lottery was a de facto single lottery and thus in breach of the restrictions on proceeds, and finally that the Gambling Commission had unlawfully restricted the scope of its review to questions of marketing and presentation.

The Gambling Commission and the interested parties (the ELM and the CICS) disputed these claims, arguing that Camelot had been guilty of undue delay in bringing the proceedings; that section 19 of the 2005 Act is concerned with private gain for non-commercial societies in question and does not entitle any gains to be made by its ELM to be taken into account, and that the Commission had not acted unreasonably or unlawfully in carrying out its regulatory duties.

Although Lord Justice Stanley Burnton was critical of Camelot's failure to bring proceedings more quickly, he did consider the substantive questions put by the claimant. He found that the Gambling Commission had construed sections 98 and 19 (non-commercial societies) properly, finding that the focus was on the society and not those with whom it enjoys a contractual relationship. It was common ground that the 2005 Act did not require that an ELM be non-profit making. That the ELM had proposed the lottery was not sufficient to make the lottery partly for private gain, and Parliament could not be supposed to have considered that the question of private gain would depend on whose idea the scheme had been, rather than its structure and operation. Furthermore, Parliament had limited the profitability of ELMs by making it an offence to pay an ELM any more than the services it provides would reasonably cost. Thus the licensing of the CICs was lawful.

Stanley Burnton LJ also found Camelot's argument as to the single de facto lottery to be unfounded. Reluctant to look behind the corporate veil, he noted that each CIC was an independent legal entity, that there was no legal basis for aggregating their proceeds and that the fact that they all used ELM to administer their lotteries was not sufficient to justify this allegation.

Raising the issue of criticism of the Gambling Commission having granted licences on the basis that the proposed scheme was capable of being legal, but was very much on the edge of so being, Stanley Burnton LJ noted that potential investors needed assurance that licences would be granted, and that the Commission would not be able to fully assess the functioning of the lotteries at such an early date.

Finally, Stanley Burnton LJ noted that it was not for the court to seek to exercise or control the powers Parliament had conferred on the Gambling Commission, but also that there no basis upon which to criticise the Commission's approach here, given that there had been no real doubt as to the facts of control of the scheme, which rested, ultimately, with Richard Desmond. In refusing permission, he agreed with the Gambling Commission that it was for Parliament to decide whether multiple society lotteries should be allowed.

This is the first case to consider the meaning of a non-commercial society under section 19 of the 2005 Act, and Camelot has stated that it tends to appeal. Should that appeal be unsuccessful, one may wonder whether it will set a precedent for more multiple society lotteries - unless, of course, the government sees fit to close this perceived loophole.

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