September 18th 2002 - issue 17

As members of Play121 wait to see if they will get any money back from the administrators, our attention switches to the other sites, and how safe are our funds within these sites? The big problem with Play121, and the reason that there is uncertainty over whether we will get our money back is because players' funds were not segregated, or ring fenced as it is otherwise known. Without the benefit of segregated accounts, we found ourselves to be unsecured creditors, hoping that the administrator would be able to realise enough value from the assets of Play121 to repay our money. So how can we avoid the risk of getting into such a situation again?

All p2p sites are custodians of your money. The only reason they have your money is to ensure that your opponent will get paid, and so they can collect their commission from you. Given these facts it is essential that your funds should be kept entirely separate from the trading funds of the business. Whilst Play121 is lesson to us all, it should not cause us to panic. Play121 as far as I am aware never made any claim that funds were segregated, whereas Betfair, Betdaq, Sporting Options, Intrade and Iwageru all state on their sites that clients funds are kept in a clients funds account. In the case of Betdaq they have also lodged an additional $10million, as an added safeguard for their customers. Tradingsports, is slightly different, in that they provide a framework for other sites to have a p2p offering, therefore, you would need to examine the banking arrangements of the site you are thinking of joining before deciding whether to proceed.

Whilst it's easy for a site to say that your funds are segregated, what is there to stop the directors of a p2p company dipping in to the clients account to borrow money to keep the business going? The short answer appears to be that in most cases there is nothing to physically stop the directors from raiding the clients account (altough the bank may ask some pretty tough questions), but there is no doubt that to abuse their clients money in this way could get the management into serious trouble. Mark Davies from Betfair commented:

"there's nothing to stop the directors outright stealing the money, but then there isn't anything to stop the directors of your bank stealing your money either... at some point you have to rely on the honesty of the people and assume they don't want to do something that would clearly land them in jail, since to do what you suggest would be fraud."

Segregated accounts would therefore appear to give us protection against a simple business failure, but could in extreme cases leave us vulnerable to fraudulent activity. As Mark Davies indicates we take such risks as a matter of course in our daily lives, so it isn't something that should necessarily worry us unduly, however there are common sense steps you can take to help protect yourself from being the victim of an outright con. I recommend that you ask yourself the following questions:

1. What do you know about the company, are they reputable, where are they based, who are the key people? If this information is not available on the site, then it may be a bad sign. There are enough straightforward up front p2p sites without the need to deal with mysterious shadowy sites tucked away on some remote Carribean island.

2. What is the site like? Has it required significant investment? No-one is likely to spend £1m setting up a credible p2p site just so they can pinch the members' money and risk going to jail.

3. What is the customer backup like? Is there a telephone number where you get something better than an answerphone? How smooth are the banking arrangements? How quickly can you get your money out?

4. Is the site successful? How easy is it to get a bet matched? No-one is likely to be moving funds around if a site is thriving, however if a site is new and failing to take off, or established but clearly in decline, you may wish to be cautious about leaving large sums in your account. It is easy with the benefit of hindsight but the difficulty in getting a bet matched towards the end of Play121 should have been a significant clue that the concept wasn't working.

If you are new to a site, firstly ensure that it does operate a segregated funds policy. Once you have established this start slowly and build up your confidence by following the common sense guidelines above. Whilst there are no guarantees in life, if you follow these rules, you should be pretty safe.