Prize draws and competitions are often seen as a popular way for businesses to engage with their customer base and attract new customers. There are many examples in our everyday lives where businesses run prize draws or competitions, either through a loyalty programme or by way of some other customer activation and which are now increasingly seen online and on social media.
Prize draws and competitions can, however, attract regulatory scrutiny if not properly run. If they aren’t governed by suitable terms and conditions and rules and are not structured correctly, the company launching the schemes can be put at risk.
There are a variety of regulatory aspects to consider when running a prize draw or competition – in particular, whether it would be caught under gambling legislation.
The Gambling Act 2005 (Gambling Act) covers the laws relating to gambling in Great Britain (Northern Ireland is governed by separate legislation) and the Gambling Commission is the regulator of the gambling industry. The Gambling Act applies to gaming, betting and lotteries. In general, free prize draws and competitions are free from regulatory control. By contrast, lotteries for private or commercial gain are illegal and where a public lottery is being run for a good cause, a licence is generally required unless it falls within an exemption under the Gambling Act.
There are two types of lotteries, a simple lottery and a complex lottery. Under Section 14(2) of the Gambling Act, three elements are required to determine a simple lottery:
- The requirement to pay to participate
- The allocation of prizes
- The determination of winners by chance.
A complex lottery is where:
- Persons are required to pay to participate
- One or more prizes are allocated to the participants in the scheme
- The prizes are allocated by a series of processes
- The first of these processes relies wholly on chance.
Prize competitions that require participants to exercise a degree of skill, judgment and knowledge are not considered as lotteries, but potential issues could arise where a prize competition is, in fact, structured in a way which suggests little or no skill is in fact required to enter.
For example, a competition which requires participants to answer certain questions, suggesting that some skill is required to enter but the answers to those questions are so obvious that, in fact, no skill is actually required to enter may be considered as a lottery. There are other examples and the Gambling Act offers some further guidance on this. Operators are encouraged to therefore consider their rules and schemes carefully.
As a general rule, prize draws/lotteries (including sweepstakes and raffles) which are being run online or otherwise, in which GB residents can participate and where a form of payment is required to enter, would be caught under the Gambling Act.
Free prize draws, which do not require payment of an entry fee, are generally not caught under the Gambling Act and the Gambling Commission does not regulate such draws. In recent years, some operators have operated schemes requiring the entrants to redeem loyalty points in exchange for a chance to win a prize. A question worth considering is whether the requirement to redeem loyalty points would be considered as being a requirement to pay to enter, which would mean that it would fall under the Gambling Act?
It is therefore crucial for competition operators to understand what “payment” really means. For the purposes of lotteries regulated under the Gambling Act, schedule 2 of the Gambling Act states that a reference to paying includes a reference to:
- Paying money
- Transferring money’s worth
- Paying for goods and services at a price or rate which reflects the opportunity to take part in an arrangement under which the participant may win a prize.
In respect of free prize draws, the Gambling Commission would not consider the following costs that are incurred to enter a prize draw as being payment:
- The cost of purchasing an item in order to enter, such as buying a promotional can of baked beans, provided that the price of the promotional product is not inflated to cover the prize or the cost of running the promotion
- Providing personal data in order to enter, such as filling in a survey, provided the request for data was proportionate and not obtained for the promoter to transfer or sell it to third parties
- The cost of making a normal rate telephone call or sending an entry form via first- or second-class postage in order to enter.
Often there is ambiguity as to what “transferring money’s worth” means. Does the redemption of loyalty points mean that there is a transfer of money’s worth? Often this will need to be analysed on a case by case basis in order to be determined. Operators need to therefore be careful when devising unique promotional structures.
The Gambling Act states that an arrangement shall not be treated as requiring a person to pay to participate if:
- Entrants have a choice of free or paid entry
- The choice is publicised in such a way as to be likely to come to the attention of each person who proposes to participate
- The system for allocating prizes does not differentiate between those who participate by paying and those who participate through the free entry route.
Providing an alternative entry option which doesn’t require the redemption of any points or vouchers could be described as a legitimate free entry in accordance with the guidance above and would be considered as a free draw under the Gambling Act.
Other compliance issues
In addition to the Gambling Act, consideration needs to be given to other regulations for the purposes of prize draws and competitions. There may be consumer protection issues and tax issues to consider.
Any competition, loyalty programme or prize draw will need to comply with data protection laws. As an overview, the main relevant legislation that will apply is the Data Protection Act 2018 and compliance is key.
If an operator wishes to engage in electronic marketing (for example, by email, text or automated calls) it will also need to comply with the Privacy and Electronic Communications Regulations. These rules apply in addition to the GDPR. When running a prize draw competition, issues of data protection and privacy are very important issues to consider for an operator.
In promoting a prize draw or competition, certain codes of practice may also apply.
The two main codes of practice relating to such schemes are:
- UK Code of Non-broadcast Advertising, Sales Promotion and Direct Marketing (CAP Code).
- Direct Marketing Association code of conduct (DMA Code).
In addition, consumer protection regulations will apply to advertising in general and it is an offence to engage in unfair commercial practice.
The Advertising Standards Agency is the regulator in the UK for promotional advertising. The Committee of Advertising Practice (CAP), a sister organisation of the ASA, is responsible for publishing advertising codes. If a prize draw or competition is to be promoted online, then such promotions will need to comply with the CAP Code.
The general rules on promotions in the CAP Code apply to prize draws and competitions and any terms and conditions of a prize draw or competition will need to take these rules into account, where applicable as the CAP Code requires promoters of prize promotions to include additional significant conditions in their marketing communications.
There are therefore significant issues to consider before launching a prize draw/ competition and careful planning is key.