Why Financial Regulation in Football Must Change

A succession of intricate passes leading to a fine team goal: the simplicity of football has long been admired by its world-wide following, but the sad, unavoidable truth is that the game is not what it once was. The seemingly endless influx of money into the sport has reduced the famous Johan Cruyff quote of football being played “with your head, and your legs are there to help you” to an unrealistic ideology, with the game now decided further from the pitch than ever before.

Competing for prestige and adulation has long since been trivialised, with the meteoric rise in commercial and broadcast revenue offering the greatest competitive driver for clubs to produce results on the pitch (Franck, 2010). This is rather unsurprising when you consider that the Premier League are set to pocket £9.2bn between 2019-2022 (Roan, Stone and Scott, 2020). Ironically however, this may leave football clubs in a worse financial position. With revenue typically apportioned based on performance, ill-advised clubs may be more willing to over-extend on their forecasted budgets in a bid to maximise their results, causing uncertainty to loom over their long-term futures.

In fear of financial mismanagement, the members of the Union of European Football Associations (UEFA) have since taken the necessary precautions and introduced a number of financial regulations, both domestically and for European competitions. Regulations such as ‘Financial Fair Play’ (FFP) and the ‘Profitability and Sustainability Rules’ have been tasked with improving the long-term sustainability of football clubs, but its effectiveness has repeatedly been overshadowed by the sheer number of scandals resulting from inadequate governance structures and regulations.

In this article I will be delving into the financial regulations currently in place in football, with particular focus on the fate of football clubs whose fans have suffered from a lack of regulatory control. Following this, I will explain the role of auditors in the sport and finally, suggest possible solutions which, whilst not fixing the problem in its entirety, would constitute the necessary steps in ensuring the biggest worry for fans is losing three points on the weekend, rather than their eligibility in the division.

Why were Financial Regulations brought in?

It is difficult to truly analyse the impact of financial mismanagement without considering the Leeds United fiasco at the turn of the century. In September 2001, the Yorkshire club confirmed that they had borrowed £60m worth of loan notes, which was the largest amount taken out by a Premier League club at that time. Withdrawn to facilitate future spending, this method of securitization placed great reliance on the club’s ability to qualify for Europe’s most lucrative club competition, the UEFA Champions League (Grundy, 2004).

(Leeds United preparing to face Valencia, in the semi-finals of the Champions League in 2001)

Worryingly for the supporters, and perhaps more for the governance in place at Leeds, this was not achieved in the 2001/02 or 2002/03 campaigns with the consequential lack of revenue leaving the club in great financial peril. Fast-forward two years, and the cut-price sales of many of Leeds’ star assets saw the club relegated to England’s second division, eventually succumbing to administration in 2007. The high-profile demise of Portsmouth and Rangers football clubs which followed, coupled with the reported net losses by Europe’s top division clubs increasing by 760% between 2006 and 2011 (Franck and Lang, 2013), flagged clear warning signs to football’s regulatory bodies. Clubs were incessantly spending beyond their means, provoking the need for appropriate financial regulation in the sport.

Financial Fair Play

Regarded as the highest profile financial regulation in the sport, Financial Fair Play (FFP) was introduced by UEFA in 2009 as a directive to be followed by all clubs with the desire of playing in their European competitions, the Champions League and Europa League. Set with the objectives of improving the clubs’ financial and economic capabilities, increasing their credibility and transparency, and protecting their long-term sustainability and viability (UEFA, 2018a), the directive appears to enforce a much-needed intervention in the sport.

The cornerstone of this is the break-even requirement: a measure of the difference between a clubs’ relevant income and expenses. As defined by UEFA, relevant income to be included in the break-even calculation includes all revenue streams (from gate receipts, broadcasting rights, sponsorship etc.), fees collected from player disposals along with any finance income received by the club. In turn, relevant expenses include those incurred for cost of sales, employee benefits and development activities, as well as finance costs and any losses resulting from player disposals. Whilst a positive break-even result is of course desirable, UEFA have set an acceptable aggregate deviation of no more than €5m in losses - which can be increased to €30m if the remaining €25m is covered in entirety by contributions from equity participants and/or related parties. The deviation is measured over a 3-year monitoring period, allowing a poor financial performance and deficit in one year to be offset by a positive break-even result recorded in another year.

To state that the implementation of FFP has been successful is certainly subjective, with empirical studies publishing mixed results. It is not so dubious however, from UEFA’s perspective. Introduced at the beginning of the 2011/12 season, the regulation was instantly justified by a 40% reduction in transfer fees (equal to £187m) spent in January 2012 compared to the previous year, perhaps due to the fear of punishment by UEFA.

(A pricey window - January 2011 brought in the transfers of Andy Carroll (£35m) & Luis Suarez (£25m) to Liverpool, with Fernando Torres (£50m) breaking the British transfer record at the time)

It has also been published that, after analysing more than 700 first-division clubs in Europe, a combined profit of €600m was recorded by the end of 2017; a great improvement considering the same pool of clubs reported a total loss of €1.7bn at the end of 2011 (UEFA, 2018b; Franck, 2014).

Since the rules of FFP can only apply to the 235 top-division clubs who qualify for European competitions in any given year (Szymanski, 2014), one of the strongest arguments in favour of the regulation has been the adoption of similar financial frameworks by many national associations (Hill, 2011). The Premier League have implemented their own Profitability and Sustainability rules, with clubs permitted an acceptable PSR loss, PSR being the aggregation of a club’s adjusted earnings before tax for the previous 3 years, of £15m. Any amount exceeding this up to £105m would require the club to provide two years’ worth of Future Financial Information as well as appropriate evidence of Secure Funding from the clubs’ owners. A loss greater than £105m is classified as a breach of the rules, permitting the League to apply the necessary disciplines (Premier League, 2020). Scaled down to accommodate for the reduced revenue in England’s second division, the EFL Championship, clubs are allowed a maximum loss of £5m, with anything up to £13m having to be covered by an equity injection by the owners (EFL, 2020).

While these statistics and derivations depict FFP as a success, the knock-on effects must not be overlooked. FFP has been widely criticised as counterproductive in nature, due to its adverse effect on European football’s competitive balance (Lindholm, 2010). By limiting expenditure to the revenue generated by each club, the financial disparity punishing the smaller clubs will only increase.

“Sugar daddy” owners (Plumley, Ramchandani and Wilson, 2019) are restricted in their ability of transcending their asset to the next bracket, instead forced to succumb to the strong hierarchical structure already in place.

In contrast, the financially elite will prosper as part of the ‘glory hunter phenomenon’ (Sass, 2014); with their historical achievements having the ‘snowball’ effect of increasing their market size, future spending ability and thus their future successes. The gulf in financial power has even been acknowledged by UEFA themselves, with President Aleksander Ceferin admitting that competitive imbalance is the biggest challenge the sport must face over the next few years in order to “keep the dream alive for all” (Chaplin, 2017).

Salary Cost Management Protocol

The loss of revenue following the collapse of the English Football League’s (EFL) broadcasting company ITV Digital (Gibson, 2002), left English division’s Leagues One and Two with no choice but to propose a salary cost restriction. Known as the Salary Cost Management Protocol, clubs would be forced to limit their spending on player wages to a certain percentage of their revenue, with League One granted up to 60%, slightly higher than the 55% for League Two. Any successes enjoyed by the protocol can largely be attributed to its interactive nature. Clubs that were forecasted to spend within 5% of their limit (permitted by their total revenue) were closely monitored by their leagues, with a transfer embargo potentially being applied as a precautionary measure if required (EFL, 2015).

Crucially however, the Salary Cost Management Protocol sets no financial restrictions on the transfer fees spent, with the lure of the Championship and Premier League causing these lower-league clubs to enter an inflationary spiral in the hope of fulfilling their ambitions (Freestone and Manoli, 2017). This led to the collapse of one of the nation’s oldest football clubs in 2019. “I have made mistakes driven by my eagerness to succeed and realise some things can take a little longer than had hoped” (Companies House, 2018) – the contents of the 2017 Chairman’s Report signed Stewart Day will be looked back upon with great disdain, with many fans recognising the acknowledgment as too little too late.

Following his appointment in 2013, Bury had seen their total creditors balance rise by 350%, from £1.6m to £7.1m in 2017, with the club repeatedly scrambling to secure enough loans in their arrogant belief that hiring better players or better managers will reap the necessary rewards (Szymanski and Smith, 1997). However, these rewards were scarce, with the club eventually forced to enter administration following financial pressures from the HMRC, trade creditors and their playing staff. Unable to then provide satisfactory proof of their financial viability, Bury FC became the first club in almost 30 years to be expelled from the Football League.

The Role of Auditors in Football

After learning of the inadequacies of the current financial regulations, it may be common practice to focus the blame on the club’s external auditor. A career so often exposed to public scrutiny; several global scandals during my short time working in a big four's audit department has allowed me to witness the drastic reform which has been forced upon it. A key element of the reform, and one which prevents any ‘expectation gaps’ forming, is that the capabilities of the auditor are fully understood, to the benefit of themselves and their client’s stakeholders alike.

With the purpose of providing confidence to stakeholders that their company’s financial statements give a true and fair view of performance (Limani and Meta, 2020), audit quality is often misconstrued as the ability to prevent and detect fraudulent activity, despite this being the responsibility of those charged with governance and the entity’s management (IAASB, 2009). With auditor’s independence often in the limelight, advising on potential financial decisions along with the provision of other non-audit services is no longer acceptable, but this should not downplay the impact auditors can have (Kinder, 2019). Audit activities such as assessing business and control risk, analytical procedures as well as sensitivity analysis of forecasts collectively facilitate the auditor’s assessment of the entity’s ability to continue as a going concern, in turn influencing the audit opinion that is issued. From a footballing standpoint, it is this assessment of clubs which significantly influences the league licensor’s decision to either request additional information from the club, or simply refuse the license outright, meaning a ‘qualified’ or ‘disclaimer of’ opinion can be extremely challenging for a club to try and cope with (Dimitropoulos, 2016).

Such is the worry of not being granted the necessary licenses, clubs with a higher leveraged position were often more inclined to choose audit firms of lower quality, in an attempt to mask their precarious financial position to the market and their regulators (Dimitropoulos, 2016). Perhaps this, rather than the reduced fees, was the reason why Bury FC hired Kay Johnson Gee LLP as their auditor, with the accountancy firm recording a revenue of just £4.4m – a trivial amount compared to the £2.1bn earned by Big-4 firm KPMG LLP in 2017.

Yet this proved futile for the club as they were still subject to an Emphasis of Matter as part of each of their audit opinions since 2012, with the existence of material uncertainty casting significant doubt on the club’s ability to continue operating as a going concern (Companies House, 2018). The correct identification of material uncertainty, in both the Bury and Bolton Wanderers financial statements, demonstrates the importance and effectiveness of auditors in football and suggests that it is ultimately the responsibility of those in charge at football clubs to manage their internal affairs appropriately. For this to occur each club will need the correct governance structure to be in place, a concept easier said than done.

Importance of Appropriate Governance

“Love United. Hate Glazers”. The phrase reverberated in and around Old Trafford by Manchester United fans encapsulates the emotions felt by many supporters towards their clubs’ owners. The questionable merit of the owners of both Manchester clubs, Blackburn Rovers and Rangers Football Club has drawn strong criticism in recent decades, with pleas made for the respective football leagues to re-evaluate the insufficient regulations currently in place.

In 2004, the Premier League and English Football League introduced the ‘Owner’s and Director’s Test’ in order to protect the well-being, image and integrity of the league and its clubs (EFL, 2005). The test essentially resolves that any person considered to have a ‘disqualifying condition’ should be prevented from being involved in managing a club. Examples of these conditions include whether the prospective owner has interests in another club in the league, has a criminal record for dishonesty or corruption, or has previously been involved in a bankruptcy or administration order.

The effectiveness of this test has been challenged often since its introduction, with the most recent case being when the Premier League rejected the takeover bid for Newcastle United by a Saudi-backed consortium, which included the Public Investment Fund of Saudi Arabia (PIF), PCP Capital Partners and the Reuben Brothers (Ahmed, Massoudi and England, 2020). Strong, unavoidable connections were drawn between the PIF and the Saudi government, leaving the Premier League particularly concerned given the latter’s involvement in a number of human rights violation cases, not least the murder of critical Saudi journalist Jamal Khashoggi in 2018.

Whilst the prohibited sale will disappoint many Newcastle United fans, it is refreshing as a neutral to see the league finally conducting the test effectively. Historically the Premier League have instead been reluctant to intervene, preferring to stay idle as clubs passed from one contentious owner to another. Manchester City is a prime example of this. The club’s sale in 2008 to Sheikh Mansour uncannily mirrors the proposed takeover at Newcastle United given the Sheikh’s prominence in the United Arab Emirates (as deputy Prime Minister), another country so deeply implicated in a plethora of human rights violations.

Embarrassingly for the Premier League, just one year prior the club was purchased by Thaksin Shinawatra, an exiled former Thailand prime minister facing a number of corruption charges; once again demonstrating the league’s incompetence when evaluating hopeful new owners.

(Thaksin Shinawatra, pictured, purchased Manchester City in 2007 - to only sell the club to Sheikh Mansour just one year later)

What Needs to Be Changed?

Following its poor application during the critical period when it is meant to be most influential, the reputation of the Owner’s and Director’s Test was left tarnished; only to be further aggravated by its lack of influence over the actions made by club ownership post-purchase. The inability to report a profit despite the increased revenues in the sport (Storm, 2012) offers a key insight into why almost a quarter of Football League clubs entered administration between 1999 and 2004 (Buraimo, Simmons and Szymanski, 2006), thus triggering appeals for club ownership to be assessed regularly by a professional body.

The formation of a new independent body, with the aim of overseeing and evaluating ownership structures, is one of many solutions offered to safeguard football clubs. With no conflict of interest thwarting its effectiveness, the body would be in a great position to enforce the requirements needed to ensure clubs appropriately plan for the future - one example being the need for clubs to submit financial plans forecasting for the next three or more years.

(Gary Neville, along with a number of high profile footballer-turned-pundits have called for independent regulators in the sport)

Enforcing stricter punishments on clubs displaying illicit behaviour could also bolster the current financial regulations. By issuing often negligible fines in comparison to the revenue the offenders generate, the little authority shown by disciplinary boards may only act as further encouragement for football clubs to exploit the system, as they know they can afford to (Kuper and Szymanski, 2009).

It is also well known that football clubs hold a unique position in society, with their cultural significance affording them the luxury of consistently reporting losses, a situation that would have undoubtedly invited creditor reaction for companies in other industries. In light of these two points, regulatory bodies should instead consider point deductions or competition disqualifications as forms of punishment; both of which being such great deterrents for clubs that the power would shift back in the league’s favour.

A hard wage cap has also been suggested as a possible solution to the issue, with the EFL’s League One and Two being the first divisions in English football to propose the theory (Price, 2020). From the 2020/21 season onwards, it was proposed that clubs in each of these divisions will no longer have to comply with the Salary Cost Management Protocol (SCMP) as covered earlier, but instead have to ensure their total spend on player wages does not exceed £2.5m (for those competing in League One) and £1.5m (for those in League Two). However, its potential introduction received mixed reception and has since been dismissed, with the SCMP being brought back in by the EFL. By attempting to mirror the salary caps utilised in the USA’s National Football League (NFL), National Basketball Association (NBA) and Major League Baseball (MLB), it seems that the EFL have failed to consider the fact that each of these leagues operate in a closed model, with no possibility of promotion or relegation. Players in these leagues are therefore only competing with their peers and will not have their attention drawn by attractive wages in different divisions. Introducing the expenditure limit in the third and fourth tier of English football will only further promote anti-competitiveness (Lindholm, 2010), with their best players inevitably lured by greater financial packages elsewhere.

In Spain’s La Liga, instead of a salary cap there is an overall cost limit imposed on each of their clubs – but this is tailored to each club’s specific financial information. A group of analysts review the finances of each club and set an overall squad cost limit, influencing both the amount spent on transfer fees and on the overall wage bill. Should a club attempt to exceed these financial restrictions they will simply not be allowed to register their players for the upcoming La Liga season, a problem which Barcelona are currently facing with their enormous wage bill needing a €200m reduction. Perhaps regulation like this needs to be trialled in the rest of European football?

(Antoine Griezmann, Ousmane Dembele (who cost Barcelona over £250 million combined) and Samuel Umtiti could all possibly leave the club in order to reduce the wage bill)

Conclusion

Whether it is fundamentally flawed or poorly executed, the current financial regulations are not appropriate given how unique and powerful football clubs are in society. Too often clubs are left to fall victim to poor financial decisions and governance infrastructures; with the succession of concerning audit opinions doing little in making the changes that are required within the organisation. Shocked by the COVID-19 pandemic, clubs already enduring times of great hardship are now faced with a challenge where there is no precedent. Reduced matchday and broadcast revenue coincided with uncertainty concerning long-term sponsorship and commercial agreements (Deloitte, 2020) has cast significant doubt over the future of many club’s in the sport, with MP Damian Collins fearing that a further five or ten EFL clubs could potentially face administration without the necessary support (BBC, 2020).

Now more than ever therefore, it is crucial for the regulatory bodies to forge a financial framework suitable for clubs, both rich and poor, to tackle the financial mismanagement which has so often stained the beautiful game. Failure to do so will have damaging effects on the football community, leaving fans to question if, and not when, they will return to their clubs’ stands once again.

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