THE DOG WITH NO BITE

Criticism of Oflot and its director general Peter Davis is mounting, but has he been given the appropriate power to ensure the Lottery is ‘run with all due propriety’?

The National Lottery Act 1993 states that the first goal of the director general of Lottery regulator Oflot is to “ensure that the National Lottery is run with all due propriety”.

But recent revelations in Marketing Week show Camelot’s behaviour has been far from appropriate for a regulator charged with monitoring one of the world’s largest lotteries on behalf of the British Government. It leaves the impression that either Oflot’s legislative framework needs to be strengthened or it should be exposed as a weak watchdog with no future.

The operator has been mired in criticism over everything from fat cat pay for its top directors and profiteering at the expense of the Good Causes, to its capabilities in marketing scratchcards and its judgement in selecting partners for licensing deals.

The latter has been brought into extreme focus by the revelations about potential conflicts of interest in the CardCall deal (MW January 10) struck by Camelot last September. The deal licensed the phone card company to manufacture National Lottery branded phone cards in an agreement estimated to be worth several million pounds. Camelot says it has now launched its own inquiry, six months after Marketing Week first called on it to do so, because of concerns over the financial background of CardCall founder Michael Zwebner.

Oflot, and its director general Peter Davis, pre-vetted the CardCall deal and decided it was appropriate. But because it was “ancillary” to Camelot’s core activities and therefore not part of its remit, it fell outside Oflot’s primary concern, underlining its inadequacies.

But with such huge sums of money at stake – the public’s money – Camelot and, all the more so, Oflot need to be seen to be beyond reproach in the way they operate. One critic says: “Davis has had a run of bad luck. He has been ham-fisted in regulating Camelot and is perceived to be slack when he needed to be tough.”

But an Oflot spokesman defends the regulator’s position. “CardCall is an ancillary, and not a core, activity. The legislation, as it stands, allows the director general to investigate individuals at the Lottery. He has no power to vet people for ancillary activities. Oflot operates within the statutory framework.”

Fresh evidence linking one of Camelot’s shareholders, Gtech, to the CardCall deal (MW January 10) and the revelation that a 100,000 payment from CardCall to secure the deal was staggered by Camelot, should mean that far from being an “ancillary” activity, the CardCall case moves centre stage for Oflot – or indeed for the Department of National Heritage, which sanctioned the regulator in the first place.

But Oflot is still not investigating. Instead, Camelot, one of the parties in the deal, is conducting its own internal inquiry. Responsibility for the investigation is now believed to have been taken out of the hands of National Lottery Enterprises marketing manager Robin Bowler and taken on by a more “senior manager”.

It all adds up to an unmistakable case for the statutory legislation being tightened. The Oflot spokesman denies that the CardCall deal has affected perceptions of the National Lottery. But that will depend on the outcome of the Camelot investigation. If nothing more, it should find that Oflot, or another independent body, needs to have a role in assessing all such deals.

CardCall is only the latest in a series of incidents which have raised doubts about Oflot’s ability to control Camelot’s activities. But it is the latest to provide ammunition for those who think Oflot is just another toothless watchdog.

When Marketing Week revealed that Camelot had set up a company called Camelot International Services (MW October 25 1996) to examine running lotteries in overseas markets, Davis was caught on his back foot. The call from Marketing Week was the first the regulator knew of the operation: Camelot had not seen fit to inform Davis of the move as was its duty according to the terms of its licence. After all, the initiative could dilute donations to UK Good Causes.

Oflot found Camelot guilty of breaching its licence but could only deliver a slap on the wrist.

Davis has previously argued that he does not have appropriate powers with which to discipline Camelot. If the operator fails to meet some aspect of its licence, Oflot can either press the nuclear button and take it to the High Court, or simply report the infringement in its annual report.

This second option was chosen after Camelot set up its international operation, but Davis says he needs something between these two extremes. This raises the question: what purpose does Oflot serve if even its director general believes it is inadequately constituted to control the National Lottery operator?

The creation of the international operation and the background to the CardCall deal are just two more embarrassments for Oflot, which has faced a barrage of criticism over the past year from MPs sitting on both the Public Accounts Committee – which investigates reports by public auditors the National Audit Office – and the National Heritage Committee.

In 1996 Davis was publicly flayed by MPs for accepting free flights from Gtech, one of the members of the Camelot consortium. He came close to losing his job, and the axe is still hovering. His actions have been scrutinised ever since.

The Department of National Heritage defends Oflot’s role by arguing that the National Lottery has successfully launched as one of the world’s biggest lotteries, and has so far raised 2.7bn for the Good Causes. To criticisms that the success of the Lottery was a foregone conclusion, Virginia Bottomley’s office argues that setting up a network of 35,000 retailers and handling a weekly turnover of close on 90m has been no easy task.

But conveniently for Bottomley’s department, it can keep Oflot’s activities at arms’ length by pleading it is an independent body which makes its own decisions. This gets to the heart of its problem: Oflot was created by the Government not simply to monitor Camelot’s activities but to grant the National Lottery licence in the first place.

Davis cannot take the blame for a legislative structure that represents a conflict of interest. The workings of the National Lottery Act mean that Davis is in the invidious position of having to discipline the very organisation he has appointed. Any infringement of the licence by Camelot leaves Oflot open to the criticism that it should not have appointed such a company to run the Lottery in the first place.

In a Labour Party report published at the end of last year, shadow heritage spokesman Jack Cunningham highlighted this conflict. The report says: “The sensitive process of awarding a licence that offers substantial profits to the winner must be undertaken as an entirely separate process from overseeing the operation of that licence.”

Cunningham’s office says if Labour gains power it will split these two roles when the next licence is awarded in 2001. It also plans to cap the operator’s profits and force it to give interest earned on unclaimed prizes – over 5m a year – to the Good Causes, rather than allow it to be added to Camelot’s profits.

But perhaps Davis could have avoided some criticism by being stricter with Camelot at an earlier stage. A report by the National Audit Office published last year showed numerous examples of how Davis had failed to check thoroughly the systems through which Camelot makes financial transactions.

This included a failure to check whether Camelot was correctly paying out prize money and whether sufficient funds were being put aside to pay prizes. The NAO report says: “In six cases… the verification of work undertaken by the director general was not fully independent of information supplied by Camelot.”

For a man with an accountancy background, Davis seems to have been less than rigorous in checking Camelot’s information. However, the report says the director general has since taken action to address the six issues raised in the report.

The only time Oflot has seriously carpeted Camelot was last autumn, when it threatened legal action against the operator for failing to install sufficient scratchcard verification terminals. Some saw this as Davis getting tough to show that Oflot’s teeth are indeed sharp.

Now Davis needs to show similar toughness on other matters, although, as he points out, he has limited means to restore public confidence and show Camelot has not just got a “licence to print money”.

After the success of Camelot in raising funds for the Good Causes, few believe that other operators would have been better suited to the job. Even the Labour Party, a constant critic of the way the National Lottery is run, says it would not sack Camelot from running the present licence, and would consider it as a strong candidate to run the next one.

Davis is less likely to be viewed so favourably.

It can be argued that Oflot and Davis are taking the flak for the failure of the Lottery Act to impose appropriate safeguards against sharp practice by the operator – in fact the fault of the Department of National Heritage. But maybe Davis will pay for any failings.

Every criticism of him is another criticism deflected from the Department of National Heritage. It does not take too much vision to see Davis as a political scapegoat for the failings of Oflot to properly monitor the activities of Camelot. If that is what the future holds, Davis may be well advised to get his retaliation in early and explain why Oflot is failing in its most fundamental duty: “to ensure that the National Lottery is run with all due propriety”.

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