Investigation: Financial Fair Play in football’s lower leagues

by Jack Wells

What do Portsmouth, Leeds United, Rangers and Deportivo La Coruna all have in common? They are all stark reminders of the financial fragility of modern-day football and how quickly the joys of ‘the beautiful game’ can turn sour.

The phrase ‘Financial Fair Play’ has been part of football jargon since it was first agreed in principle by UEFA’s Financial Control Panel back in September 2009, and it is a topic that is increasingly coming up in football discussion – be it through the media, football experts, or among supporters in the pub. Whilst it is a phrase that most contemporary football fans will be aware of, not many understand the implications that the concept of Financial Fair Play could have on European football, especially on lower league clubs already struggling to survive.

The growth of football and its financial fragility

Over the past 20 years, European football has grown significantly and at a frightening rate. Exciting, yes, but not without huge risk. In 1992, with what has been described as European football’s ‘big bang moment’, the European Cup was rebranded as the Champions League, allowing more clubs to enter the elite competition, thereby giving them access to increased revenue. In the same year, English football experienced a further injection of capital when BSkyB, backed by the media mogul Rupert Murdoch, bought the five-year TV rights to the newly formed English Premier League for an incredible £304 million. The additional money individual clubs earned through the deal gave them the opportunity to grow. The worldwide exposure of English and European football transformed clubs like Manchester United into global brands. English and European football expanded at an unprecedented rate and, although it has clearly benefited the game in many ways, such growth does not come without dangers. Football has become a multi-billion pound business, and the competition to maximise commercial opportunities is fierce to the extent that some clubs have taken big risks to expand too quickly – quite simply, gambling with their own futures.

There is no better example of a major European club spectacularly falling from grace than Leeds United. In 2001, prospects at Elland Road could not have been better. Leeds were in a healthy financial position and were playing top European teams, the likes of AC Milan, Lazio and Real Madrid, in the Champions League. The club spent heavily in the hope of maintaining their on-field success, but, in doing so, built up huge debts. Leeds budgeted on the assumption of continued Champions League income, without considering the possibility of failing to reach the major European competition. In 2002, that is exactly what happened. Two years later, the club were relegated from the Premier League as a result of selling key players, brought on by the need to repay outstanding loans and clear their debts. It is now 2013 and Leeds have still not managed to regain their place in the Premier League.

In most recent years, football has witnessed the era of the billionaire ‘sugar-daddy’ owner. As we have seen with the likes of Manchester City, Chelsea and Paris Saint-Germain, a football club can be a toy to a rich and ambitious businessman. Last season, Chelsea became European champions for the first time in the club’s history, thanks to their Russian billionaire owner, Roman Abramovich, who invested in excess of £1 billion in order to achieve his dream of winning the Champions League. Also, Manchester City’s owners, the ruling family of Abu Dhabi, have spent almost £1 billion in under four years – the majority of it on buying and paying players – to assist the club in winning their first Premier League title. To put £1 billion into perspective, the average income in the UK, per person, is roughly £26,500. If you earn £26,500 a year and don’t spend a penny of it, it will take you 37,736 years to save a billion pounds.

Whilst this sort of spending on the world’s finest talents undoubtedly excites the supporters of Manchester City and Chelsea, and improves the Premier League as a product, in the long-term, it is simply an unsustainable financial model. In December 2012, Manchester City announced a loss of £99.7 million for the 2011/12 season, following losses of £197.5 million the previous season (2010/11) and £121.4 million for the season before that (2009/10). Manchester City have not been “living within their means” in that they are not able to generate the required levels of revenue from ticket sales and merchandising to match the funding provided by their ‘benefactor’ owners.

In 2009, UEFA did a study of the 655 European football clubs and learned that half of them ran a deficit the previous year. As was the case with Leeds United, spending extravagant amounts, in order to feed the appetite for success, can have catastrophic consequences. ‘Financial Fair Play’ is seen as the antidote to help prevent a “Leeds United” from happening in the future.

Preserving the future of lower league football

Unfortunately, lower league football is not exempt from the effects of the recession and, much like other industries, football clubs face similar challenges in the current economic climate. Until this season, Football League matchday attendances appeared relatively unaffected by the recession, but a recent survey, conducted by the BBC, revealed that falling attendances and player costs were a cause for concern among many clubs in the Football League.
In layman’s terms, ‘Financial Fair Play’ has the objective of protecting the long-term sustainability of club football. To quote the English Football League, “it aims to reduce the levels of losses being incurred at some clubs and, over time, establish a league of financially self-sustaining professional football clubs.”

While the main discussion revolves around the big spenders at the peak of European football, the impact Financial Fair Play could have on clubs lower down the football ladder is often forgotten. Interestingly, statistics prove that the financial problems in European football reside not primarily with clubs in the top divisions, but with clubs aspiring to reach the top divisions. In England, the likes of Plymouth Argyle, Port Vale and Portsmouth are just a few clubs who have entered administration in the 21st century. Of course, UEFA’s FFP rules only apply to those clubs aspiring to participate in European competition; they don’t affect the minnow clubs of English and European football. However, the concept of Financial Fair Play is something that is now being adopted and adapted in England’s domestic leagues.

The English Football League allowed each division to decide on the format of their own respective rules. Clubs in the Championship division agreed to a ‘break-even’ approach, similar to the UEFA Financial Fair Play Regulations. The system will require clubs to provide annual accounts to the Football League by December 1 every year, showing their profit/loss for the financial year, excluding investment in specific areas of club infrastructure or losses in certain “extraordinary” circumstances, such as the default of debtor clubs or sponsors, for which they cannot be held responsible. Come the 2014/15 season, a club that is in breach of the rules will face sanctions. If the club has been promoted to the Premier League at the time of the decision, they can be fined, or they can be subject to a transfer ban if the perpetrating club remain in the Championship when judgment is made. For this season and the next, no sanctions will be imposed on clubs who break the rules, allowing for a transitionary period for measures to be implemented.

A lot of work remains to be done for many clubs in the Championship, with the likes of Leicester City (-£29.7 million), West Ham United (-£25.5 million) and Bristol City (-£14.4 million) all posting huge losses for the 2011/12 season. Two of those three aforementioned clubs also operate at high wages to turnover ratios: Bristol City at 157% and Leicester City at 130%.

As opposed to the ‘break-even’ system, clubs in Leagues One and Two have settled on the ‘Salary Cost Management Protocol’, or ‘SCMP’ as it is often referred to, which looks to limit player wage expenditure to a proportion of a club’s turnover (55 per cent in League Two and 65 per cent in League One, which will decrease to 60 per cent in 2013/14). The SCMP system has been in operation in League Two for several years already, but on a ‘monitoring’ basis. However, the new system now governs League One too, and the Football League now has the power to impose a transfer embargo penalty on clubs who break the rules.

In League One, Swindon Town became the first club to feel the iron fist of the Football League, after breaking the new regulations when they exceeded the spending limit of 65 per cent of their turnover in October last year. Swindon were tipped over the edge after a league tribunal ordered them to pay a combined £340,000 for midfielder James Collins and defender Troy Archibald-Henville. Swindon, though, were not the first club to be handed a transfer embargo. For the second half of the 2009/10 season, Notts County were given the same punishment.

“We [Notts County] were victims of financial mismanagement just a few years ago, when Munto Finance arrived to takeover the club with promises of millions of pounds of investment and Premier League football at Meadow Lane,” says Jamie Dixon, the Head of Media at Notts County. “As has been well documented, the money never materialised and that which had been spent already in chasing this fanciful notion left the club several million pounds in debt.”

Of course, for the 2009/10 season, SCMP was in place in League Two but only for monitoring purposes; only at the start of this season has SCMP had the teeth to penalise clubs. Despite this, prior to the new rules, the Football League is, and was, able to place a transfer ban on any club that has an insolvency event. Notts County were served with a winding-up petition from HM Revenue and Customs and were therefore punished with a transfer embargo – the punishment now used in the new SCMP rules, and a punishment that Dixon doesn’t entirely agree with.

“In my personal opinion, this, unfortunately, may be where the system falls down in some ways. Placing a transfer embargo on a club, after they have tied themselves into contracts that they can’t afford to pay, doesn’t stop them from playing those players and it doesn’t help to pay the wages of those players. The club are still burdened with the financial costs, whilst the club’s competitors still have to play against the players. That is not to say that there is an easy solution, rather to point out that it is perhaps not as simple as we would like to regulate this.

“There was quite a vociferous response from several clubs in League 2 towards the end of the 2009/10 season, most notably those challenging for promotion alongside Notts, but the punishment was the greatest that could be handed out under the rules that they, as member clubs, had agreed to. The same applies with FFP as it stands today, the maximum punishment for breaching the rules is a transfer embargo, so it remains to be seen if this will be enough of a deterrent to make the rules effective.”

Whilst, as a concept, FFP is something the Notts County Head of Media agrees with, he believes that few would suggest that a truly watertight solution has been found to counteract the financial fragility of modern day football.

“I don’t think there is any doubt that there needs to be something done to address the rising cost of football, which has filtered through to the fans in terms of ticket pricing, but in such a competitive market, it is difficult to know who should take the lead in enforcing any change.

“The Football League governs our main competitions obviously, but the scale of club that they cover amongst their 72 members is such that it is near impossible to get any agreement on a suitable structure that works for all, helps bring down the cost of football, whilst also keeping the ‘richer’ teams as competitive as they expect to be. Even in League One, the spectrum of finances is quite immense.”

As was highlighted in the parliamentary select committee report on football, published in January 2013, there is the fear that Financial Fair Play, without other key changes, could just further damage the competitiveness of football. Indeed, FFP may help football to run on a stable basis, but could it simply produce a “pecking order” of clubs, based upon matchday and television income, effectively increasing the divide between the ‘rich’ teams and the ‘poor’ teams?

Another cause for concern, throughout the world of football, is the existence of potential loopholes that could be exploited by football’s big spenders, who may find it difficult to comply with the rules. At the top level of English football, Manchester City’s announcement of their lucrative £400 million sponsorship deal with Etihad was met with suspicion. Etihad, the Abu Dhabi-based airline company, is owned by Sheikh Mansour bin Zayed al Nahyan, who also owns Manchester City.

In a similar situation, the French club Paris Saint-Germain came under scrutiny recently after agreeing a £700 million deal with Qatar Tourism Authority (QTA). The deal will see PSG receive £122 million this season, rising to £200 million next season. QTA, like PSG’s owners Qatar Investment Authority (QIA), is an arm of the Gulf State. According to the French newspaper, Le Parisien, the deal does not include shirt sponsorship or stadium naming rights, but it will help promote the country of Qatar.

In the cases of Manchester City and PSG, they do not need approval from UEFA to enter any sponsorship agreement. Only if the deal is classified as a ‘related party transaction’ can UEFA investigate. The specific provisions of this rule are to ensure that owners of clubs are not able to artificially inflate a club’s revenues in an effort to help the club comply with FFP rules by providing the club with a massive sponsorship deal from one of the owner’s other companies.

Sir Alex Ferguson, the manager of Manchester City rivals, Manchester United, made it public his serious doubt that UEFA would be able to police their Financial Fair Play regime. Ferguson suggested that he believed there may be ways around the regulations in that clubs could maintain the huge rewards for players without incurring damage to balance sheets. He told The Independent, “what’s to say [clubs couldn't be] providing player houses in Abu Dhabi or Dubai? I don’t know how you police these things to be honest with you.”

The concerns raised by Ferguson are echoed by Matt Porter, the Chief Executive of League One side Leyton Orient, who is worried that some clubs will try to find ways to exploit similar loopholes in the SCMP regulations. He says: “There are examples of clubs at our level where boards or owners think of imaginative ways of injecting money, whether in the form of sponsorship or donations, but as long as the money is not put in as loans then it is within the regulations by and large.

“Obviously the responsibility rests with clubs to increase turnover so they can spend more on wages, and this can be done in many ways but the most obvious one, which doesn’t have a pre-requisite of on-field success, is for the owner to inject more capital.”

The responsibility also lies with the governing bodies to clamp down on clubs who clearly attempt to escape the FFP rules. UEFA’s General Secretary Gianni Infantino insisted that any sponsorship deal, like Manchester City’s deal with Etihad and PSG’s deal with QTA, would be rigorously scrutinised by expert panels to ensure that the agreement represents ‘fair value’. If related party transactions breach them, the relevant amount will be deducted from the break-even calculations. It remains to be seen whether UEFA, and indeed other bodies imposing FFP regulations, will clamp down on clubs looking to exploit these loopholes.

Despite the concerns, the likes of Bristol Rovers and Leyton Orient are two clubs who were among those who significantly supported the Football League’s SCMP regulations. Bristol Rovers currently operate with a salary cap of 55 per cent, and the club’s Financial Director, Toni Watola, believes this has had the desired effect of helping to stabilise the club’s finances. “I have nothing but support for these regimes as long as an owner who wants to have a punt with his cash is allowed to, and that there are safeguards to ensure that the funds for that punt are not in the form of loans,” said Watola.

Similar to the view of Watola, Matt Porter believes that the implementation of the new FFP systems is one of the best things to have happened to English football in recent years. “SCMP has led to a more sensible approach to players’ wages and has prevented clubs from risking their financial security chasing the dream of promotion. It will only create problems for clubs who don’t do things the right way.

“It’s probably the single most important thing to happen to professional football in this country since the Taylor Report and advent of the Premier League as it will prevent a large number of clubs from committing financial suicide, as many have done over the past decade.”

Fortunately for Leyton Orient, they have not been one of those clubs, and in turn, adaptation to the SCMP has been easier, explains Porter: “Fortunately we were operating at a relatively sensible level anyway but the change has meant we have had to reduce our players wages to sit within the 65% threshold this year and we will have to do so again to be at 60% next year.”

The future for lower league football

“There is clearly much more that needs to be done to educate fans on the way the rules work and the implications,” says the Financial Fair Play expert, Ed Thompson.

“The rules should provide a buffer between the fans, who always clamour for greater expenditure, and the directors. They also put a check on the more foolhardy and reckless owners. Increasingly, the owners of clubs are talking about Financial Fair Play rules when explaining their player-signing policy.
“However, the position is not well understood and fans at Ipswich openly questioned whether the owner was using the rules as an excuse for lack of investment. In reality, it looked like the club had problems and FFP actually helped them to justify a wage and signing policy that was desperately overdue.”

Whilst in Ipswich Town’s case, their explanation of FFP was legitimate; Thompson says the lack of education for fans could allow clubs to use FFP as a disguise for lack of funds.

“There was an interesting scenario at Leeds recently, where the owners don’t appear to have a great deal of cash, despite previous assurances to the contrary. When Leeds recently sold [Luciano] Becchio, the owners announced that they could not afford to meet his new wage demands because of the constraints imposed by FFP. In reality, Leeds regularly break-even, albeit with some player sales, and actually had the lee-way to increase the player’s wages. The owners appear to have been using FFP as a smokescreen to disguise their lack of funds.”

Like Matt Porter of Leyton Orient, Ed Thompson believes that the introduction of FFP to lower league football will have an immense impact on its future, but he does think some clubs will benefit more than others.

“The changes are probably as significant as the Bosman ruling was and will change football significantly,” says Thompson. “The financial climate is tough in the Football League and although the rules don’t in themselves make it easier to survive, they will take away the temptation to put the club at risk by overspending.

“The mid-ranking clubs in each division who have not had a recent relegation look likely to be the ones to gain most. Relegation from the Championship to League One looks like, at least in the short term, it will cause some clubs with expensive set-ups to miss the SCMP criteria and have a ban imposed. We might see fewer clubs ‘bouncing back’ after relegation and clubs might be able to achieve back-to-back promotions through League 1 and 2. Having said that, it is going to be hard to forecast.

“Clubs that have spent heavily and failed to win promotion might start to struggle – for example, Leicester City and Sheffield United, if they fail to get promoted this season. Well-run clubs will certainly prosper and it is worth keeping an eye on [Leyton] Orient – they are a small club but look to be well run and could take advantage of some of their peers’ need for transition.”

However, unlike the likes of Porter and Dixon, Thompson isn’t worried that the FFP rules regulating English football’s lower leagues will be susceptible to ‘loopholes’ and bending of rules by clubs.

“I really don’t think this will be an issue [clubs finding loopholes]. A club’s relationship with the Football League is much closer and more regular than it is in respect of the UEFA licensing process,” explains Thompson. “Also the process works differently in that clubs have to provide regular information to the Football League – any attempt to pull the wool over their eyes would be pretty obvious.

“But the same potential ‘loopholes’ do occur, essentially relating to ‘related party transactions’. However, there aren’t many clubs operating on the pure ‘benefactor model’ in the Football League. We don’t have a Mansour [Manchester City owner] or Al Fayed [Fulham owner] or Abramovich [Chelsea owner] willing and happy to pump huge amounts of money into the club.

“One of the issues with the rules might be the lack of a Monitoring Period. If a club were to sell a player to the Premier League for lots of money, the club could report a profit. However, despite earning a profit in one year, the club wouldn’t be able to use the funds in the bank to justify increased spending in year two. It will be interesting to see how this plays out.”

Ed Thompson’s final sentence is a generalisation of the common consensus that it is a case of “wait and see” whether FFP has the desired effect on the financial security of football. On the whole, the concept of FFP is one that has been mostly welcomed across the football spectrum, as it is considered that any intervention was better than nothing at all. There has been a growing concern from supporters and commentators, over several years, about the financial management of football. However, as highlighted by Jamie Dixon earlier, it is too soon to suggest whether a “watertight solution” has been found.

In England, we now have four layers of FFP regulations – UEFA, Premier League, Championship, and Leagues One and Two – all with the same goal, but all with different rules. It is a confusing landscape. Will this restrict clubs too much? Will governing bodies punish clubs trying to evade the regulations to good effect? Will it just increase the divide between the ‘rich’ clubs and the ‘poor’ clubs? Will FFP alone be enough to lift football out of the doldrums of financial fragility? These are just several questions that need answering, and only time will yield the true answers. At least now, though, action is being taken to help better control the economy of football, and if operated correctly, the growth of the game can be better managed.

2 Responses

  1. Tom Salmon says:

    I found your article excellent.

    The biggest problem for supporters of any club is that they have to balance the desire of promotion with the need to be prudent in the club.
    One factor I think you could have expanded on was the way in which a clubs Academy could help in overcoming the need to spend large amounts of money on players to boost your team.

    As a Leeds supporter over many years I have seen all sides of the financial coin. My own view is that it is better to have club than have no club. It is the responsibility of the Board to control the finances of the club and FFP is a step in the right direction.

    Many thanks for an interesting article.

    Tom Salmon

  2. Jack Wells Jack Wells says:

    Thanks, Tom!

    I agree, the factor of club academies is definitely an area that I could have expanded on. Coincidentally, I am considering doing a follow up piece which will look at grass roots football in England. I could link that with FFP for the reason you have just given!

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