Football & the (New) Independent Regulator
This article is the fifth edition of The BackPage Weekly, a weekly publication by the Sheridans Sport team.
Written by Daniel Geey, Kieran Mercer and Chris Paget
“The financial issues across the pyramid are due to several reasons, including: poor financial planning; over-reliance on owner funds; unsustainable levels of loss and debt; high costs; and a lack of resilience to shocks and changes of financial circumstance. When clubs overspend, experience a shock - such as withdrawal of owner funding - and lack a financial buffer, they find themselves distressed. The lack of resilience means they struggle to carry themselves over until they can return to a sustainable state - increasing income or safely downsizing financially.”
The case for an Independent Football Regulator (IFR) is, in part, made by the above White Paper excerpt. Pundit, Gary Neville, has talked at length on the need for an IFR too.
In the week that the government published the White Paper (GWP) on its plan to introduce an independent regulator for professional clubs in the English football pyramid, this edition of the BackPage Weekly focuses on one element of the GWP - the club financial sustainability proposals and considers the significance of such a framework for the top five tiers of English football.
The Aim of the IFR
The GWP’s overarching aim through financial regulation is to ensure clubs are “more resilient and sustainable…[and] to mitigate the risk of financial distress”. Such a framework forms the backdrop of various financial control systems already in place (generally allowing limited permitted losses) at EPL, EFL and UEFA[1] competition levels. Interestingly, the IFR sets out an alternative, perhaps more proportionate approach.
The GWP’s specific focus is on areas of “club sustainability [and] systemic stability.” It details the current “defective regulatory landscape” with rules that have been “inadequate at mitigating financial distress”. The GWP is somewhat dismissive of current rules on permitted losses (“does not encourage sustainable spending”) and spending wage caps (“can reduce overspending but are prone to circumnavigation”) and presents an alternative.
The IFR Licence
The IFR will put in place a licence framework meaning that any top five tier club will need an IFR licence to operate as a football club. There are ‘Four Threshold Conditions’ for the licence with the first relating to clubs having adequate financial resources[2]. A proportionately more robust approach will be taken with clubs that are operating unsustainably.
In short, clubs will be required to have:
“adequate financial resources and controls in place, to meet committed spending and foreseeable risks. Examples of multi-year business plans including scenario planning for key potential risks and including the club having the necessary finances to meet anticipated outgoings and a financial buffer in preparation for worst-case scenarios”.
IFR Powers & Sanctioning
The GWP[3] provides practical examples of what the IFR would do in the case of a club operating unsustainably. It explains how a club would need to improve its financial condition by for example, reducing outgoings, increasing its liquidity cash buffer and increasing owner guarantees. By way of contrast, the EPL rules classify such owner guarantees as Secured Funding[4] including payments into an escrow account or a personal guarantee from the owner of the club overing a specific funding amount.
For those looking for the mega sanctions for initial breaches or non-compliance, Part 4 of the GWP sets out the IFR’s practical approach to club intervention. A four-stage approach appears initially to be light touch (“compliance through advice, soft influencing and informal engagement”) with breathing space for clubs to “sort-it-out” before matters are escalated. However, when matters are escalated, there are significant interventions that can be made, including:
· powers to compel club action; and
· appointing external individuals to take control of a club and improve a club’s financial predicament.
The IFR will also seek to hold senior decision-makers accountable for a club’s adherence to the regulations. Clubs will be required to state which individuals hold the levers of power and the IFR will be able to sanction “the culprits” of any wrongdoing directly and in isolation. The aim of such targeted sanctioning is to minimise the effect of failures on innocent parties such as fans and players. The fourth stage in extreme sanctioning situations (“for persistent, flagrant and wilful non-compliance”) could lead to disqualification for those involved and even appointment of a set of trustees to run the club until the club is sold.
Although the IFR will, therefore, not be putting in place any explicit cost control provisions, what it will instigate, as part of the licence criteria, is a robust process of club financial planning and forecasting submissions and then stress-testing the club’s assumptions to ensure if the worst happens, the club will ultimately survive.
Final Thoughts
Whilst this is only one part of the overarching framework that the IFR will be ultimately responsible for, many of the points regarding financial sustainability appear well articulated and proportionate. The industry will now have a clear understanding on the government’s direction of travel which will be further informed by the upcoming targeted consultations that the government will be undertaking in advance of finalising the proposals and ultimately implementing new legislation.
While the specifics are still to be confirmed, and while there may still be wranglings with national and international football regulators (such as concerns by FIFA and the potential for the IFR to constitute “political interference”), the IFR will likely soon be at the centre of an industry that has long thought it could take care of itself.