Updated UEFA, EPL and EFL Football Cost Controls
It continues to be a time of great flux in the football industry. Broadcasting rights rebates, league seasons being curtailed, actual and potential administrations, EFL announcements on cost control measures and plenty of Projects (Restart, Big Picture and Beautiful Game). EFL Chairman Rick Parry has warned of an impending £200m EFL black-hole. Richard Masters had previously announced that EPL clubs are not immune to the new COVID world. Even Manchester United’s 19/20 accounts showed a pre-tax deterioration from a £27m profit to a £21m loss. Indeed the UCL 19/20 rebate to broadcasters was estimated to be north of half a billion Euros. There are likely to be significantly difficult times ahead for the whole football family.
As a result of such systemic turbulence, a variety of football regulators have made changes to their cost control regulations. The aim of this blog is to piece together the current state of play and an outline of what the new regulations will permit.
The UEFA Financial Fair Play (FFP) break-even rules ensure a club, more or less, has to balance its books. All clubs wanting to play in UEFA competition must submit the required licensing documentation to the relevant national football association (and for break-even purposes to UEFA). Acceptable deviation is the term used to describe break-even. Acceptable deviation allows clubs to pass the FFP break-even test without actually breaking even. The acceptable deviation provisions allow a club with some losses over a certain number of seasons to ‘break even’ and therefore pass the FFP regulations.
Three years’ worth of accounts need to be provided to UEFA to demonstrate if the club has complied with the rules. For example, a club playing in last year’s 2019-20 Champions League competition season would have been required to have provide 2018-19, 2017-18 and 2016-17 accounts to show they did not make more than a €30m loss over those three accounting years.
UEFA recently came up with rule changes to allow greater flexibility in how they will ensure FFP club compliance. It is set out in excellent detail by Swiss Ramble in this twitter thread. In summary, UEFA’s change of their regulations covers two monitoring periods:
· For the (current) 2020-21 season, the break-even assessment will be made based on two seasons (2017-18 and 2018-19) but not the COVID interrupted 2019-20 season.
· For the next 2021-22 season, the break-even assessment will be based on four seasons (2017-18, 2018-19 and then an average of the 2019-20 and 2020-21 seasons). It effectively means as UEFA explains: “the adverse impact of the pandemic is neutralised by averaging the combined deficit of 2020 and 2021 and by further allowing specific COVID-19 adjustments.”
These specific COVID adjustments (see more detail here) allow UEFA to take into account appropriate adjustments for the break-even calculation by making an adverse financial impact adjustment. In summary, UEFA will take into account the “loss of revenues between the average revenues relevant for the calculation of the break-even result recognised in the reporting periods ending in 2020 and 2021 and the corresponding anticipated average revenues foreseen for the same periods.”
The EPL regulations are not called FFP but rather the Profitability and Sustainability Regulations (PSR). There are two substantive cost control thresholds. At the lower level, EPL clubs can make a £15m loss over a three year rolling accounting period subject to certain conditions (e.g. an owner loan injection). At the higher end, clubs can make a cumulative £35m loss per season over a three year rolling accounting period (i.e. a total loss of £105m with certain conditions attached (set out below)).
If a club’s losses exceed £15m for the three year period, the club in the relevant season has to provide:
· future financial information to the EPL; and
· evidence of sufficient secure funding (which includes monies in escrow, personal guarantees or a letter of credit) of up to £90m.
In past years, if a club breached the cumulative £105m limit, the EPL board had the power to compel a club to adhere to a defined budget (Rule E.15.1) and/or refuse to register any new or existing player contract (Rule E.15.3). Interestingly, the latest EPL regulations (Rule E.53) sets out that no club in respect of the 19/20 season (presumably because of COVID) will be deemed to have breached the regulations and be sanctioned accordingly. There does not appear any similar provision for the current 2020/21 season.
Nonetheless, as was reported in October 2020, certain EPL clubs and EFL had been negotiating a much larger agreement (the basis of Project Big Picture) covering topic areas including FFP and cost controls. The reports suggested changing the PSRs and aligning all EPL and EFL break-even provisions with the above UEFA standard.
During the beginning of August 2020, EFL League 1 and 2 clubs voted for introduction of Squad Salary Caps (SSC). The caps were set for this current 2020-2021 season at £2.5m for League 1 and £1.5m for League 2. The regulations contain a significant amount of detail around what is included in any salary cap. This includes “Basic Wages; Taxes; Bonuses; Image rights; Agents’ fees and; Other fees and expenses paid directly or indirectly to all registered players” plus “[p]ayments directly linked to a Club’s progression in cup competitions or promotion are excluded from the Cap, [and] any income generated from players going out on loan”.
There are two additional SSC elements:
1. Committed Contracts: For contracts already in place, they will be ‘notionally’ capped at an agreed divisional average so that a club will not be sanctioned due to contracts entered into before the regulations were agreed upon. Similarly, for clubs relegated to L1 or L2, such contracts are again capped at the divisional average “prior to the Club’s relegation until those contracts expire”.
2. Cap Overrun: Clubs are given some leeway if their total squad salary payments “exceed the Cap by up to 5%, whereby dependent on the percentage level of the overrun, a financial penalty would be payable for every £1 in excess”. For any amount over the 5% excess, the EFL will refer the club to an independent commission for sanctioning. Interestingly, the EFL is employing technology to dynamically monitor the SSC on a real-time basis so presumably quicker referrals and commission decisions can be made.
Shortly after the announcement, the PFA attacked the EFL’s approach arguing that additional consideration and consultation should have been undertaken before finalising their SSC approach. Their document sets out the PFA’s concerns about a quasi-hard cap, its rationale and the principle that consultation when undertaken by UEFA, F1 and Premiership rugby for similar cost controls took a number of years to finalise, transition and implement. Watch this space.
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