One Small Step for the Premier League; One Giant Leap for Financial Prudence?

Introduction

It seemed only a matter of time before the Premier League (PL) jumped aboard the financial regulation ship. Some of its clubs have already been subject to the break-even regulations since UEFA made an initial splash with its groundbreaking regulations. The Football League (FL) has recently introduced its own financial fair play (FFP) regulations for its Championship league and the Salary Cost Management Protocol for its Leagues 1 and 2. Financial prudence comes at a time of global austerity but the effects of the latest broadcasting windfall appears to have struck a chord with a number of PL owners.

Background

PL and foreign clubs alike (bar a few jurisdictions) have historically been able to spend beyond their means in their search for success. Such astronomical spending usually occurs through the injection of funds from benefactors willing to subsidise a club’s cost base. The PL, just like other leagues, has welcomed external investment into its football clubs. The one regulatory jigsaw piece missing from the PL handbook  is something which has formed the basis of the updated UEFA Club Licensing Regulations as well as the recent FL FFP rules. It is the break-even aspect that is absent in the current PL regulatory framework. The reasons why the PL are now contemplating further cost controls may include the following:

• PL club owners are keen to ensure the new likely £5bn+  television deal stays (to a degree) out of player’s pockets. The rationale is that a salary cap will collectively dampen the wage market because the twenty PL clubs will only have finite wage resources to allocate to their players.

• Around half of the clubs competing in the PL may already be planning to compete in UEFA competition and therefore will have to adhere to types of cost control mechanisms like the UEFA FFP rules in any event.

• In an age of ‘fiscal prudence’, there may also be a heightened appreciation of the public mood of austerity and belt-tightening.

On 7th February,  the PL voted in favour of draft proposals covering profitability and sustainability and short term cost control measures. This translated into FFP style regulations along with a quasi-wage cap that will be explained below. The actual vote of these wide ranging regulations could not have been closer. It was reported that six clubs (Southampton, Swansea, Manchester City, Fulham, West Brom and Aston Villa) voted against the proposals and Reading abstained. Under the PL constitution, a two-thirds majority is required to authorise regulatory change. As only 13 of the 19 votes cast were in favour, the vote was a close call.UEFA and the FL have previously justified such regulation as a means of ensuring that PL clubs balance their books and do not spend more than they earn so that they ultimately become self-sustainable. In the context of the PL regulation, this is now to be achieved through:

• some losses being acceptable in the first years of implementation;

• only incremental wage increases being permitted ; and

• a wide selection of sanctions including the possibility of fines, transfer bans and points deductions.

The Details In relation to FFP, clubs can make a £15m loss over a three year rolling accounting period. This means that a £5m per season loss can be covered by owner loans. Clubs can make a cumulative £35m loss over a three year rolling accounting period (i.e. the first being 2013/14, 2014/15 and 2015/16) I.e. a total loss of £105m if:

• owners guarantee the funding;

• show financial forecasting projections to the PL (which is already required); and

• £90m of the loss is injected into the club by way of equity (shares).

Regarding the salary control restrictions, only a £4m increase in the wage bill for PL clubs will be permitted.  If a PL club spends more than an additional £4m on wages from the previous season, the additional wage cost can only be funded by increased commercial revenues that the club has made during that season. The below table sets out the defined amounts

Season The extra amount of PL Central Fund revenue that can be used to fund player wage costs (cumulative) If the wage bill is below the following figure, then the club are exempt from the restrictions 2013/14 £4m £52m 2014/15 £8m £56m 2015/16 £12m £60m

 With regard to the salary control regulations, it appears that such rules will be in place for next season. Therefore for the 13/14 season, the £4m cap on wages will be enforced. There are already reporting requirements that ensure that PL clubs have to submit certain types of information like providing Future Financial Information (FFI) showing clubs can meet all liabilities that fall due for the year ahead. The outcomes of such reporting requirements may result in breaches of such salary control provisions which could lead to sanctions like points deductions.

PL chief executive Richard Scudamore said at the time of the announcement:

‘The clubs understand that if people break the £105m cap we will be looking for the top-end ultimate sanction range, a points deduction. The changes will show everybody that we are serious about financial fair play. A new owner can still invest a decent amount of money to improve their club, but they will not be  spending hundreds and hundreds of millions in a very short period of time.’

Just as is the case with the UEFA and FL rules spending on academies, training facilities, community schemes and stadiums can be offset against other defined costs like player wages and transfer fee amortization for FFP compliance. It means such longer term spending strategies are encouraged and are excluded from the break-even calculation. Until the regulations are made public (likely in the PL handbook this summer), it is not clear whether these exempt costs will be defined in the same way as the UEFA and FL regulations.

What the regulations will have to deal with

In relation to restrictions on the cumulative £105m loss, the club accounts for next season will be the first in a three year accounting cycle that clubs will need to provide to the PL to demonstrate FFP compliance. A number of questions will no doubt be raised by such an approach and will have to be clarified in the drafting of the FFP regulations. In particular:

• How will the PL require a club who spends large sums in the first regulated year (the 13-14 season) to guarantee the loss that has been made? The regulations may have to stipulate that if indications from year 1 (13-14) are that losses over that period will exceed the permitted £15m then the PL will ask for 3 years ahead of secured guaranteed funding. This leads to timing issues as to when the guarantee will have to be made by the owners. Presumably, it would have to be when the spending is taking place and not at the end of the first three year cycle. Therefore such a guarantee would be needed when the future financial information is provided to the PL. This leads to the most important question as to whether clubs could be sanctioned for non-adherence to the FFP regulations from next season if owners do not guarantee certain spending levels.

• What sanctions could be imposed? In theory, anything is a possibility but in practice, just as the FL have done when implementing their FFP rules, the harshest sanctions (e.g. expulsion/relegation) were not considered appropriate. FL FFP sanctions involve either a registration embargo or a fine. The UEFA Club Financial Control Body have been given express powers which include at Article 21 the possibility of a points deduction, disqualification and/or removal of title. Until the UEFA FFP regulations are tested with relevant cases, it is difficult to assess which sanction will be afforded to which circumstance. Undoubtedly, the harsher the infringement, the more severe the penalty. It therefore remains likely that the PL clubs who voted in favour of regulation will decide that registration embargo’s or fines will be preferred to expulsion or relegation.

• There is then the thorny issue regarding how FFP will affect promoted clubs. Will their accounts for years that they are in the FL be used to assess PL FFP compliance? Similarly, will a promoted club’s accounts for the previous year they were in the FL be used as the wage benchmark for how much a club can spend on wages?

• The PL may also seek to adopt:

  • luxury tax provisions that the FL put in place for its regulations. Such a sanction allows for any fines for breaches of the financial rules to be circulated to the compliant clubs as a way of incentivising compliance; and

  • the wage exemption used by UEFA in their Annex XI provision which excludes wages for contracts entered into before the rules were brought into force. This has the advantage of allowing further costs to be excluded for the break-even calculation purposes.

• Close scrutiny of the related party transaction (RPT) clauses in any drafting will be necessary too. This should be borne in mind with particular reference to the recent controversy surrounding the sponsorship deals entered into by Manchester City and PSG in relation to Etihad and the Qatar Tourism Authority.

• Lastly, a fundamental question that this author is currently investigating into further is whether the rules could be challenged by the OFT/European Commission as being anti-competitive.

Conclusion

Until the regulations are published this coming summer, the answers to a number of the above questions will not be known. What is certain is that financial regulation is now firmly entrenched into a once fiercely free market, laissez-faire league. Controlling costs through escalating wages and transfer fees is something clubs have resolved to limit in advance of the latest television bonanza. It still remains to be seen whether clubs will as a result start making profits.