On 25 April 2012, the Football League announced that following two years of discussions, a Financial Fair Play model (the “Football League FFP Rules”) would be introduced to cover all three of its divisions (the Championship, League One and League Two) from the beginning of the 2012/13 season.
This article examines the Football League FFP Rules and their practical, commercial and possible legal consequences.
The Football League FFP Rules
During the consultation period leading up to the introduction of the Football League FFP Rules, the Football League allowed each division to decide on the format of their own respective rules. Clubs in the Championship decided to embrace a ‘break-even’ approach, similar to the UEFA Financial Fair Play Regulations, however Leagues One and Two have adopted the ‘Salary Cost Management Protocol’ (the “SCMP”) which seeks to limit player wage expenditure to a proportion of turnover.
The Championship has adopted a similar system to UEFA Financial Fair Play, where clubs must seek to balance their income and expenditure to ‘break-even’. Each season, on 1 December, clubs must submit accounts to the Football League to show a profit-loss before tax (excluding specific investment (e.g. infrastructure costs, youth development, and promotion related bonuses) or losses of an extraordinary nature (e.g default of debtor clubs or sponsors)) which must be show profit, break even or a loss less than the total of the permitted acceptable deviation and shareholder equity investment. A club is allowed to appeal to the Financial Fair Play Panel to argue that certain expenditure should be deemed “extraordinary” for the purposes of the break-even calculation, should it need to do so.
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The first reporting period for the Championship will be for the current season (2011/12), with accounts to be submitted to the Football League on 1 December 2012. Despite this, there will be no sanctions imposed on any clubs who breach the rules during the first two seasons (2012/13 and 2013/14) which allows for transitionary measures to be implemented. However, from the 2014/15 season, robust sanctions will be introduced for any clubs which breach the rules, which will differ depending on whether the club is promoted to the Premier League, remains in the Championship or is relegated to League One.
If a Championship club breaches the Football League FFP Rules and is promoted to the Premier League, that club will be required to pay a ‘Fair Play Tax’, which ranges from 1% of the excess between £1 and £100,000, up to 100% of any excess over £10,000,000. This can have a very profound effect on the club, as is indicated below. Any ‘Fair Play Tax’ paid by promoted clubs will be redistributed to those clubs in the Championship who have complied with the Football League FFP Rules.
If a club breaches the Football League FFP Rules and remains in the Championship, that club will be subject to a transfer embargo which starts from the transfer window immediately following the submission of the accounts (i.e. the January transfer window) until such time as that club is able to file accounts which adhere to the Football League FFP Rules. That club will also not be eligible to receive any monies from Financial Fair Play Taxes imposed on promoted clubs. The Football League have confirmed that the form of the transfer embargo will ordinarily be to prevent any further players coming into the club, but may also restrict players leaving the club, if to do so would reduce the squad size to such an extent that the club may not be able to fulfil its remaining fixtures.
If a club breaches the Football League FFP Rules and is relegated to League One, that club will not be eligible to receive any monies from the Financial Fair Play Taxes imposed on promoted clubs and will then be subject to the Football League FFP Rules of League One. However, such a club will not be subject to a transfer embargo, unless in so going down it then surpasses the SCMP threshold (see below).
While some may argue that it is unfair, based on the considerable parachute payments that are awarded to relegated clubs by the Premier League, clubs that are relegated from the Premier League will not be subject to the Football League FFP Rules in their first season in the Championship, however, should they be promoted in that season, they will be subject to the Financial Fair Play Tax should they contravene the regulations during that season. A relegated club could therefore not simply ‘buy’ a route out of the Championship.
Leagues One and Two
As opposed to a break-even approach, clubs in Leagues One and Two have decided to embrace the SCMP. The SCMP, which has been used in League Two since 2002/03, seeks to limit expenditure on wages to a percentage of a club’s turnover. Clubs must submit account information to the Football League at the start of each season and continue to do so as the season progresses. Any clubs which breach the relevant threshold will be subject to an immediate transfer embargo. In certain circumstances, this embargo will be enforced ‘at source’, where the Football League will not sanction transfers which will put a club above the relevant threshold. A club will not be permitted to register a new player again until either it moves under the threshold, or there is enough budget to afford the wages of a new player (if, for instance, the club sells or releases a player or it increases commercial revenues).
At the beginning of the 2011/12 season, clubs in League Two imposed a threshold of 60%, which will continue during the 2012/13 season.
Clubs in League One are currently ‘piloting’ a 70% SCMP, but without any sanctions being applicable for those clubs which breach the threshold. However, as of the 2012/13 season, a 65% threshold will be imposed, which will reduce to 60% in the 2013/14 season.
The Football League FFP Rules represent the first real effort in England to either actively combat ‘financial doping’ or to protect clubs from themselves. While the UEFA Financial Fair Play Regulations (the “UEFA Regulations”) which operate in the Premier League prohibit those clubs contravening the regulations from participation in UEFA sanctioned competitions (i.e. the Champions League and the Europa League), the effectiveness of the UEFA Regulations can be questioned, based on their rather lenient acceptable deviations. Further, the majority of Premier League clubs are effectively not subject to the UEFA Regulations, as they only affect those clubs seeking to participate in European competitions; newly promoted clubs, for instance, have no incentive to comply with the UEFA Regulations. In fact, it may be seen as prudent for these clubs to invest in their squad to maintain their Premier League position, notwithstanding that in doing so they will be in breach of the UEFA Regulations.
The Football League FFP Rules will have a profound effect on clubs within the Championship, who now have two seasons to put themselves into a position where they are in compliance. Unless clubs seek to invest heavily in their squads with a view of gaining promotion to the Premier League before the 2014/15 season, the introduction of the Football League FFP rules will require significant changes in the way that clubs are run. From the practical inception of the Football League FFP Rules, Championship clubs will not be able to operate on losses of more than £8,000,000, reducing steeply thereafter each season. It is clear that should Championship clubs contravene the regulations and fail to get promoted, a severe punishment in the form a transfer embargo will be imposed, which will clearly affect the ability of the club to be promoted in the future. Further, should a club brazenly ignore the regulations and gain promotion, the effects could be more profound, at least financially. If a club promoted to the Premier League has a profit-loss deficit of £15,000,000 (after acceptable deviation and shareholder equity investment), it will have a ‘Fair Play Tax Bill’ of £11,681,000. While some may still invest and merely see the tax as a cost associated with promotion to the footballing and commercial ‘promised land’ of the Premier League, should that club fail to gain promotion in such circumstances, then a transfer embargo would be imposed on that club, which could remain in place for the foreseeable future (i.e. until that club can comply with the Football League FFP Rules). As such, to some extent, the Football League FFP Rules are inescapable.
The SCMP that is in operation in Leagues One and Two has been in force for some time (it has operated in League Two since the 2002/03 season). While the SCMP has been in force this season in League One (at a threshold of 75%), no sanctions have been imposed on clubs surpassing the threshold. However, in the 2012/13 season, the SCMP will come into force in League One, when the threshold will be reduced to 65% (decreasing each season thereafter) and sanctions will be imposed on those clubs breaching the rules. To an extent, the SCMP will have a less profound effect upon those clubs in League One and Two as the ‘break-even’ rule will have on clubs within the Championship, however the threat of a transfer embargo should certainly not be ignored. An ambitious club in League Two that spends beyond its means would be subject to an embargo in League One, should it be promoted. At the exact time when such a club needs to make investment, it will effectively have its wings clipped.
As with the UEFA Financial Fair Play Regulations, the most prudent way for a club to operate under the Football League FFP Rules is to seek to lower wages and expenditure on transfer fees, whilst attempting to boost commercial revenues. If a club can do all three simultaneously, that club is likely to enjoy a relatively fruitful future (at least financially speaking).
However, the reality is that many clubs may not be able to perfect this trifecta for some time. While a club may seek to sell players with relatively large wages, it does not necessarily mean that they will be able to do so, especially when one considers the restricting effect of the transfer window. Further, such players may not be of a high enough calibre to justify another club, whether or not subject to the Football League FFP Reuglations, to spend such sums on the services of that player. In light of the UEFA Financial Fair Play Regulations, Premier League clubs have been able to reduce their wage bills by selling unwanted (but still international standard) players abroad; for clubs in the Football League selling ‘lesser’ players may be more difficult.
Away from the playing field, in a commercial sense, it is quite clear that Premier League clubs have enjoyed, and will continue to enjoy, a considerable advantage over clubs in the Football League in any attempt to increase income through commercial avenues. In the past, the Championship has been an attractive playground for football players, who have been able to find similar (if not better) remuneration in England’s second tier, than would have been possible in top flight competitions elsewhere in Europe. While this ‘overspending’ has led to a wage to revenue ratio of 88% in the Championship (according to Deloitte figures) and fairly widespread financial difficulty, it has allowed the Championship to maintain a comparatively high level of football, which in turn has driven revenues both from commercial sources and ticket sales. The constraint that will be imposed upon Championship clubs from the 2014/15 season may threaten its attractiveness to sponsors and fans alike. Lest it be forgotten that the Championship has averaged higher attendances than many of Europe’s top flight divisions in recent years, and this by no part down to the protagonists on the field of play. Should commercial revenues fall, so too must transfer spending and wages; it is not hard to see a spiral effect emerging. In any event, these ‘well run’ clubs would still benefit if others around them are subject to sanctions under the Football League FFP Rules.
However, the introduction of the Football League FFP Rules would not necessarily be all doom and gloom. Football League research has indicated that collective debt in the Football League could reach £2 billion. In the current economic climate where investors willing to rescue ailing clubs are no longer stepping forward, clubs should be actively encouraged (or if not encouraged, forced) to seek a sound financial footing. While all clubs see the advantages of being promoted in the short term, perhaps what is best in the uncertain years to come, is sound financial management.
Further, the Football League FFP Rules should now mean that clubs who foster young talent to sell or otherwise deal wisely in the transfer market will be able to benefit for their success. Currently, despite Southampton FC fostering the talents of Theo Walcott and Gareth Bale, amongst others, their spending power relative to clubs such as Leicester City FC and West Ham United FC is still relatively small.
Unlike the introduction of the Home Grown quota which operates in European competition and in many of Europe’s leagues, the legality of which could be questioned before a European court, any challenge to the Football League FFP Rules would be likely to lack foundation, based on the fact that clubs in the Football League have agreed to have these constraints imposed upon them. Just as clubs in the Basque region of Spain have in the past artificially imposed upon themselves rules against fielding any player without a Basque origin, so too have Football League clubs created artificial barriers for themselves.
While a Premier League club demoted to the Championship, or a team from the Blue Square Premier promoted to League Two could argue that they were not signatories to the original agreement and therefore should not be subject to the effects of the Football League FFP Rules, Rule 3.1 of the Football League Rules states that to be a member of the Football League, each club must agree to “be bound and comply with… [the Football League Regulations] [and] the terms of any agreement entered into by the [Football League]”. Any argument is therefore likely to fall on deaf ears. In any event, it is still open for a club relegated to the Premier League to refuse to enter the Football League and instead join the Blue Square Premier.
One could certainly make a convincing argument that the introduction of the Football League FFP Rules is a good idea. Indeed, clubs in the Football League have imposed the rules upon themselves. However, while it has become increasingly clear that football clubs need to manage their finances in a more sound fashion, any changes made should not risk the commercial viability of the Football League.
Darryl Taylor, currently of Squire Sanders (UK) LLP can be found on LinkedIn and contacted by email at email@example.com and by telephone on +44 207 655 1000.
The content of the article represents the views of the author and in no way represents the views of Squire Sanders (UK) LLP