Walking around Betfair’s plush offices on Hammersmith waterfront, it is as if the dotcom crash never happened. Televisions flash out the latest sports news, trendy thirtysomethings rush around geeky twentysomethings, and all seem to have smiles on their faces.
Betfair certainly seems to be thriving, but the acres of empty office space surrounding the small company are a chilling reminder that while Betfair is buoyant, the economy most certainly is not. Betfair claims to be revolutionising betting, but then boo.com claimed to be revolutionising the fashion industry.
In its short lifespan, Betfair has already made some dangerous enemies. If the company is to survive and prosper it will be in spite of the bookmaking industry, and not because of it.
David Williams is the bright young thing charged with leading the legal fight. He has survived one dotcom casualty (Bob Geldof’s deckchair.com) and is determined not to become victim to another.
Williams was seduced by the dotcom revolution while at Ashurst Morris Crisp in France. He jetted back to the UK after three years of hard M&A slog, convinced by friends that London was the place to be. But within six months deckchair.com was running out of cash fast and Williams had resigned. But despite getting burnt, he is refreshingly confident that Betfair is a winner.
Betfair started life three years ago as the brainchild of Andrew Black, a professional punter, statistician and software developer, who saw the possibilities of applying an order-driven securities exchange to the world of betting. “The really important thing,” says Williams, “is that it couldn’t have happened without the internet.”
At betfair.com customers can place or take bets, and so cut out the need for the bookmaker and save having to fork out on its profits. Betfair makes money by taking a commission of two to five per cent of the net winnings. This, of course, has not exactly enamoured Betfair to conventional bookmakers.
“The bookies have huge resources, huge lobbying resources and endless MPs on retainers,” says Williams. “The regulatory powers are under constant pressures from bookmakers trying to undermine our progress.”
Williams is trying to make as many friends as possible to outweigh the enemies. “The whole thrust of our work is to make sure we’re totally legit. If the regulators want to close us down, they can close us down,” he says. Williams has expanded Betfair’s in-house capability with a hire from Clifford Chance. He and his number two spend the majority of their time liaising with the various regulators.
Despite the hostility from conventional bookmakers, Betfair is classed as a bookmaker and has the appropriate UK permit. As such, the company comes under the regulatory control of the Department of Culture, Media and Sport (DCMS). The DCMS is concerned with three things: protecting the punter, keeping organised crime out of gambling and protecting the vulnerable.
Williams claims that Betfair offers solutions to the DCMS’s concerns. With regards to protecting the punter, the first worry is dishonest bookmakers not paying out and the second is the bookmaker going bust and disappearing with punters’ funds. On the first issue, Betfair does not take any bets, so it has no incentive to make its exchange anything other than safe for the punter. Of the second, Williams says: “Nobody can place a bet unless they’ve downloaded enough funds to an account with us. So nobody can default on a bet.”
This raises deposit-taking issues, which are dealt with under the Financial Services and Markets Act 2000 by the Financial Services Authority (FSA). But the act has exclusions that apply to Betfair: the money is taken by way of security for the provision of services and the company’s business is not materially funded by the deposits.
“Those deposits are sacred. They’re held in a ring-fenced subsidiary, so that even if we went bust we have a standalone entity that has nothing but clients’ funds,” explains Williams.
There are two main threats from organised crime. These are money laundering and skullduggery, a great old Victorian term for race-fixing. “We’ve had lots of talks with the DCMS about money laundering and they think that if someone’s going to launder money, a betting exchange is just about the last place on earth they’d do it,” says Williams. The funds taken by Betfair are already in the banking system and it has systems in place that quickly identify unusual movements of money.
And in relation to skullduggery, Williams explains: “Unlike conventional bookmakers, we’re not interested in the outcome of the race itself; we don’t lose either way, so subject to privacy concerns it’s always in our interest to share information on suspicious activity. We also never take cash, so all betting transactions leave an indelible audit trail to a named individual.”
Despite this, there are problems. “We’re such a new thing that they’re trying to squeeze us in to legislation which is sometimes 30 years old, sometimes 150 years old,” says Williams. Some of the cases concerning betting date back to the early 19th century. Williams adds that discussions with the DCMS have been going well and that together they are working through the problems of regulating this completely new phenomenon.
The main legislation for the industry is the 1963 Betting, Gaming and Lotteries Act, but the DCMS has been conducting a massive review of the gaming and gambling sector. Following the publication of the Gambling Review Body’s ‘Budd Report’, the DCMS has published its ‘Safe Bet for Success’, which is aiming for royal assent in 2004.
Other key relationships Williams is building are with Customs and Excise, the Horserace Betting Levy Board, the British Horseracing Board, the British Greyhound Racing Board and the Jockey Club. When Betfair launched, it fell into a hole that meant that it was not liable for betting duty. But the whole system has changed and Williams worked closely with Customs and Excise to bring betting exchanges into the betting duty net. From October 2001, Betfair has been paying betting duty.
The company saw off one enemy when it bought rival betting exchange Flutter in December 2001. It was a company that Williams almost joined before his brother helpfully suggested speaking to Betfair founder and chief executive Edward Wray, a former JPMorgan banker. The companies had been in a head-to-head battle for 18 months. While Flutter, run out of Silicon Valley, had immense resources, good name recognition and a wide user-base, its product was quite simple compared with the sophistication of Betfair’s exchange.
The company used Ashursts, Williams’ former firm, for the share-for-share deal. Indeed, Ashursts is used for most major corporate, commercial or intellectual property work. “Ashursts have fantastic depth and you know that the advice is of the highest quality,” says Williams.
Ashursts has also been involved with Betfair cases regarding cybersquatting in Germany, trademark issues and a case of defamation in its chatroom. On taking the job, Williams had anticipated that these would be his biggest issues, but they have been overshadowed by the wider betting issues.
Williams inherited a valuable ally and his only other regular outside counsel from Flutter. Tony Coles, senior partner at Jeffrey Green Russell, is, says Williams, “one of the foremost authorities on betting and gaming”.
Ashursts and Jeffrey Green were used on another important deal for the company. Betfair signed a sponsorship agreement with Fulham Football Club this season to provide better exposure outside of racing. The company is also providing a person-to-person betting platform for DrHoBets, a big name in betting in Asia, and is undertaking a similar
co-branding exercise with the Racing Post.
With 50,000 users and a turnover of more than £50m a week, Betfair is clearly doing something right.
Head of Legal
|Turnover||£50m per week|
|Head of legal||David Williams|
|Reporting to||Chief executive Edward Wray|
|Main law firms||Ashurst Morris Crisp and Jeffrey Green Russell|