Difficulties defining and regulating lotteries

Lotteries and charity lotteries have recently come under increased scrutiny as regulators question whether operators require licences to run such activities. For example, Ireland recently passed its Gambling Regulation Bill which challenged the definition of a lottery. In the US, sweepstake casinos have also become popular and their legality is being questioned.

In this article, our gambling partner Richard Williams considers the definition of a lottery and how the UK manages regulating this area of law.

The words “raffle”, “draw” or “sweepstake” have no legal definition, but are commonly used to refer to a lottery. A “lottery” is a specified category of gambling under the Gambling Act 2005 (the Act), but it isn’t always easy to identify. A lottery requires payment and allocation of a prize by chance. For example, paying to pick numbers in a random draw to win a prize is a lottery.

Alternatively, paying to play a game of chance to win a prize is classified as “gaming”. If numbers in a draw are pre-selected for the player and this is played as a game, this is “bingo”, which doesn’t have a definition under the Act but is a sub-category of gaming. Selecting numbers in a lottery which forms part of the National Lottery is not gambling under the Act, but is separately regulated. Predicting numbers in another lottery can be regulated as “betting”.

The boundaries between these different categories of gambling have become more difficult to determine, leading to calls to regulate all gambling activity as “gambling”.

How are lotteries different from other types of gambling?

True lotteries cannot be operated for commercial gain, and a minimum of 20% of ticket sales must go to benefit a good cause (e.g. a charity). Regardless of size, lottery operators must be licensed by either the local authority or the UK Gambling Commission. Some types of small-scale lotteries are exempt.

Small society lotteries cannot sell tickets valued at more than £20,000 in each lottery or £250,000 in a calendar year. The maximum prize is £25,000. Large society lotteries can sell up to £50m in tickets annually, with up to £5m ticket sales per draw and a maximum prize of £500,000.

External lottery managers can obtain a licence to manage lotteries on behalf of societies, provided that 20% of the ticket sales are paid to the good cause.

Increased competition for lotteries

Regulated lotteries have always been considered a low-risk type of gambling. Due to this, and because lotteries benefit good causes, they are not subject to the same regulatory scrutiny and criticism as other forms of “harder” gambling. Like all gambling, lottery stakes are funded from disposable income and over recent years lotteries, whether large or small, have faced increasing competition from other types of regulated and unregulated gambling.

Physical lottery tickets and scratchcards are now less common, as society lottery operators migrate to online ticket sales. There have been complaints from charities and other good causes, that raising funds from lotteries is becoming more difficult as consumers are attracted by more interactive and exciting gambling games on offer, such as those in online casinos.

Society lotteries have also raised concerns about financial restrictions on ticket sales and prizes, which place them at a disadvantage to the National Lottery and other forms of gambling. Financial limits on lotteries were raised by the Government in 2020. In March 2022, the Department for Digital, Culture, Media & Sport (DDCMS) concluded that these changes had led to reduced expenses for lottery operators and more returns for good causes.

Lottery reform

In recent years, lotteries have also come under pressure from the growth of free draws, particularly on social media platforms. Compliant draws must have an option to enter for free (usually by post) and are currently free of regulation in Great Britain. Free draw operators are not required to contribute to good causes, although many do. However, voluntary charitable contributions are likely to be well below the 20% of ticket sales paid by lotteries. Society lotteries have complained that their share of spending is being eroded by these high-profile draw operators, many of whom advertise on TV and radio, with no limits on prizes or tickets sales, and that this is having a knock-on detrimental effect on returns to good causes.

The Government’s White Paper on gambling reform expressed an intention to review these free draws, in order to protect consumers who it said were confused about the difference between free draws and genuine lotteries. The DDCMS subsequently issued a survey setting out proposals, ranging from the introduction of a code of practice, to taxation and regulation. To date, there has been no legislation brought forward to regulate free draws.

As technology moves ahead at a rapid pace, lotteries have had to evolve to remain relevant and to maintain their market share. Lotteries face challenges, but paying a small stake for the chance to win a life-changing amount will no doubt remain a popular leisure activity in the years to come.

If you have questions about the regulation of lotteries and other forms of gambling, please contact Richard Williams.