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Football Governance - Culture, Media and Sport Committee Contents


4  Football financial management

Debt in the game

66.  One of the big challenges facing English football is not generating revenue but controlling expenditure. Deloitte publishes an Annual Review of Football Finance. Its latest edition, published in June 2011, analyses financial information for the 2009/10 season. Its key statistics on profitability and loss reveal the extent of the challenge:

  • Operating profit margins in the top division have reduced from 16% to 4% over the lifetime of the Premier League.
  • The Premier League clubs in aggregate made an operating profit of £83 million (up 5% on the previous year), but pre-tax losses after financing and player trading costs deepened to £445 million in 2009/10.
  • Premier League clubs' net debt at summer 2010 was £2.6 billion (a reduction on 2009: £3.3 billion).
  • Championship clubs' operating results worsened for the sixth consecutive year, to a record loss of £133 million. Fourteen Championship clubs lost £5 million (2008/09: 12 clubs). Overall, Championship clubs are spending £4 for every £3 they generate in revenue.
  • The aggregate net debt of the 24 Championship clubs increased to £875 million at summer 2010.
  • League one clubs made a record operating loss of £52 million, and League two clubs made an operating loss of £8 million, a marginal improvement on the previous year (£9 million loss).
  • Between 1992/93 and 2009/10, the aggregate operating profit of Premier League clubs was £1.6 billion. Over the same period, the Football League clubs made an aggregate operating loss of £1.4 billion.
  • The top 92 clubs, as a whole, lost money on their day-to-day operations and, at the pre-tax level, losses have continued to grow, exceeding £600 million in 2009/10, while collective debts stand at around £3.5 billion.[94]

67.  Professor Richard Giulianotti observed that:

there is clear evidence that there is too much debt. A UEFA report last year indicated that, for the 2007-08 season, English Premier League clubs accounted for 56% (£3.5 billion) of the net debt of all European clubs—a grossly disproportionate figure.[95]

A number of other commentators and supporters organisations expressed similar concerns about the amount of debt in the English game. Professor Stefan Szymanski, however, was more sanguine. He argued that, while English football debts were far higher than any other in Europe, so were the assets:

Deloitte estimated the net debt of Premier League clubs at £3.3 billion in 2008-09, against income of £2 billion. By the standard of most businesses this level of debt is not excessive. Of course, individual clubs may have too much debt, but without full access to the management accounts of a business it is not easy to be sure about what constitutes 'too much'. I do not believe that current levels of debt in English football endangers its long term future.[96]

68.  Figure 2 below charts the profit margin for Premier League clubs in aggregate as profits (losses) expressed as a percentage of turnover between 1996 and 2010. It shows a clear downward trend from break-even at the turn of the century towards increasing combined losses:

Figure 2

Pre-Tax Profit Margin (%), Premier League 1996-2010

Source: Deloitte Annual Review of Football Finance, various issues.

69.  We asked a number of Premier League clubs whether they were concerned with debt levels. Manchester United Chief Executive David Gill appeared relaxed about the club's ability to manage its debts:

The debt level that we have is £500 million in gross terms. There is roughly £130 million in cash in the bank at the moment, so there is a net debt of £370 million. We have gross interest costs per annum in the order of £45 million, and our cash profits are around about £100 million. So we have more than two times interest cover.[97]

He observed that "from my own perspective, we know that the debt is there but it doesn't impact on what we do. We look at trying to grow our revenues and invest in the business to make sure that we can continue to expand and be successful".[98]

70.  Stoke City has neither the revenue-generating capacity, nor the level of debt, of Manchester United. Stoke City Chairman Peter Coates told us:

I think there is nothing wrong with debt so long as it is sustainable debt and affordable debt. I think that that is the critical matter. Quite clearly, Manchester United can afford their debt. Debt is wrong when you cannot afford it and you are irresponsible.[99]

Niall Quinn, Chairman of Sunderland, acknowledged that club owner Ellis Short had inherited a quite sizeable debt, but noted that "we have reduced that debt by about 25%".[100] Premier League Chief Executive Richard Scudamore accepted that Portsmouth's insolvency had taken the Premier League by surprise: "we didn't foresee a club with that amount of revenue being able to get itself into the sort of difficulties that Portsmouth got into".[101] The Premier League argued though that the overall system was healthy and that "in general, Premier League clubs have survived the continuing economic turbulence reasonably well". It cited Liverpool and Manchester United as examples of clubs that had taken active steps to reduce levels of debt.[102]

71.  The Premier League and its clubs, therefore, gave the impression that they felt they were on top of the debt problem. When we asked Greg Clarke, the Chairman of the Football League, however, he was far less confident. He told us that debt was the problem in the game:

If I had to list the 10 issues that keep me awake at night about the Football League it would be debt, one to 10. […] The level of debt within the Football League is absolutely unsustainable, and we have got three working parties, one for each division, working really hard on how we bring our level of debt down.[103]

It is worth observing too that although—with the obvious exception of Portsmouth—Premier League clubs appear more able to handle their debts whilst they are in the Premier League, there are a number of examples of clubs that have experienced grave financial difficulties when they have been relegated and no longer have access to the promise of Premier League revenues to appease creditors. Burnley Chairman Barry Kilby, for instance, observed that: "when Leeds went into administration [while in the Football League] that all stemmed back to an extremely ambitious set up that was all geared towards being in the Champions League and at the top of the Premier League".[104] Derby County fan James Wheeler wrote that on October 2003 Derby County was put into administrative receivership due to debts following relegation from the Premier League.[105]

72.  Other examples of clubs which have struggled with debt since leaving the Premier League include Barnsley, Bradford City, Coventry City, Charlton, Hull City, Ipswich Town, Leeds United, Leicester City, Nottingham Forest, Queens Park Rangers, Sheffield Wednesday, Southampton, Watford and Wimbledon. It is also the case that individual Premier League clubs have lived a precarious existence for a time, when they required new injections of investment to address levels of debt that their owners were struggling or simply unable to service. Chelsea, Liverpool, Manchester City and West Ham United have all needed to be rescued in this way. Sean Hamil told us that "what went on at Manchester City with Thaksin Shinawata was absolute skin of the teeth escape from a financial disaster. The same thing up at Liverpool. Now, how long do you have to continue to be lucky?"[106]

73.  We acknowledge the successes of Premier League and Football League clubs in increasing turnover and improving the spectator experience since the 1980s, but we are concerned by the extent to which English clubs are making losses and operating on the edge of viability. Of course, it is the ability to service debt that is the key factor in any business, but because of demands on clubs, not least from escalating wages, there is no doubt that debt remains a serious problem throughout the football pyramid.

What is causing the debt problem?

74.  There appear to be a number of factors contributing to the debt problem in the English game. The first point to make is that, at one level, debt is not a new problem. Andy Williamson, Chief Operating Officer for the Football League, pointed out that there had been a lot of uncertainty at the point that the Premier League was formed in 1992, with two clubs (Aldershot and Maidstone United) going bust around that time. That said, certain characteristics inherent in the new model do appear to have aggravated the problem. A number of witnesses highlighted the extent to which the financial benefits associated with membership of the Premier League had the effect of encouraging reckless financial speculation. The key issue here is not simply the amount of revenue that a Premier League club can generate, but the growing gap between what a Premier League club and a Championship side can generate.

75.  Deloitte records that in 2009/10 Premier League clubs' revenues were over £2,000 million (ie exceeding £2 billion for the first time), five times as much as Championship clubs' revenues of just over £400 million. Premier League clubs generated average revenues of £102 million. Deloitte points out that this masks significant variation, with the four 2009/10 Champions League participants (Arsenal, Chelsea, Liverpool and Manchester United—who receive a slice of Champions League broadcasting rights and more home gate receipts, as well as gaining additional commercial opportunities) generating average revenues of £227 million in 2009/10; Manchester City and Tottenham Hotspur generating revenues of £125 million and £120 million respectively; and eleven other Premier League clubs (excluding those which were relegated) generating average revenues of £66 million. By contrast, the Championship clubs in receipt of payments from the Premier League following their relegation generated average revenues of only £35 million and the remainder generated average revenues of only £12 million.

76.  Deloitte figures show that there are huge financial incentives to play in the Premier League and, within the division, huge financial incentives to get into the top four. Deloitte has estimated that there is a minimum £90 million financial prize for the winners of the Football League Championship play-off final for promotion to the Premier League—making it the most valuable match in the world.

77.  It is not just about the financial rewards, however: football never has been just about money. For a number—perhaps most—owners, the ability to generate greater revenue is a means to an end: sporting triumph; sporting prestige; reflected glory; and community standing. A key motivation to get into and then remain in the Premier League is to build up the club, not make a profit. Sean Hamil observed that:

there is a famous academic paper by Peter Sloane that says what sports club owners do is they maximise utility not profit. They want sporting success, therefore they always overspend. Alan Sugar used the rather crude expression 'the prune juice effect' about Tottenham: money goes in one end and out the other end to players.[107]

Tony Scholes, Chief Executive of Stoke City, which has finished 12th, 11th and 14th since returning to the top tier for season 2008/09, alluded to the pressure simply to consolidate: "The No 1 challenge […] is putting a team out on the pitch that is good enough and competitive enough to stay in the Premier League—to stay in the best league in the world".[108] Sunderland Chairman Niall Quinn, speaking mid-season, revealed the pervasive insecurity in the middle of the table when he commented that "we are not mathematically safe at this moment in time, but we are up in eighth place in the Premiership". Even though his club was in the top half of the table, he was still calculating the number of points required to ensure that his club could not be over-taken by clubs in the relegation zone. The other side of the coin—ambition to climb the table, could also be heard in his claim that "we can look at playing European football at the Stadium of Light. That has to be the next realistic target for us now".[109]

78.  In similar vein, Burnley Chairman Barry Kilby spoke of the pressure to over-spend in order to remain in the Premier League during his club's recent season in the top tier: "The word 'ambition' always crops up—lack of ambition is one of the usual ones you get in the phone-in programmes".[110] He noted too that fans' expectations were likely to increase during a second season in the Premier League:

When we got up it was a bit easier at first. We were new, we hadn't been in the Premier League for 30-odd years, so perhaps it was easier to keep the fans' expectations; we are being sensible, we're clearing our debts, if we do go back down we'll be able to handle it. I think they did understand, but I've got a feeling if we had been in another year or so the pressures would have built to spend more.[111]

The earlier experience of Bradford City, whose owner went on a spending spree subsequently dubbed "six weeks of madness" in a failed attempt to survive a second season in the Premier League, rather bears out Barry Kilby's comments.[112]

79.  When the wealthier owners in the Premier League spend their own money—on top of revenue generated—on transfer fees and player wages, in pursuit of better performance and wider non-financial ends, this puts considerable pressure on other owners to spend their clubs' revenue (and more) on players. The fact that the wealthiest owners in the Premier League, the proprietors of Chelsea and Manchester City, have almost unlimited resources to spend on their sides tends to inflate the overall market for players and further ratchet up the cost of staying in the Premier League. In 2009/10 Chelsea and Manchester City recorded the two highest operating losses in Premier League history, of £38 million and £55 million respectively. Ian Watmore observed that:

one of the reasons that the Burnleys of this world get to that level [spending up to £50 million a year to sustain a place in the Premier League] is because the Chelseas and Manchester Cities of this world have stretched it so much up here that just to get ordinary players they now have to pay twice the wages they used to have to pay and so on, and the television money hasn't kept up with it.[113]

Steve Coppell, who has managed two sides with smaller revenue-generating potential in the Premier League (Crystal Palace and Reading) concurred, suggesting that the Premier League was "a power league" and that "it is very difficult to go beyond one or possibly two seasons' success without the input of substantial funds".[114] He also noted that it was difficult to succeed by developing youth players because "if you have a great youth team then in the next transfer window you lose your three best players".[115] Brian Kilby contrasted the financial demands of the Championship with those of the Premier League:

In the Premier League you're now starting to get into really big money, £40 to £50 million on top, and even that doesn't make a big impact. So I think with a Championship club it is directors' loans and so on. Once you get into the Premier League it is getting exceptionally rich people who can put their own personal money in.[116]

[…] It is difficult, because essentially in the Premier League you're competing sometimes against people who don't care. They don't even care about the economics of the thing.[117]

Further up the table, former Aston Villa manager Martin O'Neill doubted whether it was possible to challenge for a Champions League place on a regular basis without a very significant financial outlay. Evidence from a number of sources, including former FA Chairman Lord Triesman, suggested that the behaviour of the most spendthrift clubs amounted to "financial doping".[118] Since the Premier League became the top tier of the football pyramid, the financial benefits associated with its membership have incentivised clubs continually to increase their expenditure to gain promotion into the Premier League, consolidate their position in the Premier League or achieve the additional rewards associated with a top four placing and entry into the European Champions League. Teams in the Premier League spend up to the hilt to stay there, and teams in the Championship spend up to the hilt to get there.

Wages

80.  It is important to note, as Figure 3 below shows, that there is a strong positive relationship between wage expenditure and league position. Other things being equal, spending more on wages translates into on-pitch success. Deloitte suggested that this impacts particularly on clubs in the middle—those aiming either to close the gap on the clubs above them or to retain their Premier League status. Hence Portsmouth, despite turnover of over £50 million, was spending over 100% of its revenue on wages when it went into insolvency. In the Championship, the overall ratio was 88% in 2009/10, actually a slight improvement from a record high of 90% in the previous season. Around a third of clubs in the Championship reported a wages/revenue ratio of 100% or more. Deloitte, meanwhile, suggested that a 60% ratio is prudent.

Figure 3

Wage Expenditure and League Position
Premier League 2008/09 Season

Data Source: Deloitte annual review of football 2010

81.  It is perhaps unsurprising, therefore, that the financial demands on clubs seeking to remain in, or ascend to, the Premier League are revealed most starkly in the amount of turnover spent on wages, of which the main component is player wages. In 2009/10 the Premier League wages/revenue ratio reached an all time high of 68% compared with 44% in 1991/92. Figure 4 below plots wages/turnover over a longer timeline, to show the extent to which the Premier League is associated with a new trend:

Figure 4

Wages and Salaries as a Percentage of Turnover for Clubs in Top Flight 1947-2003

Data source: Companies House[119]

Players and agents

82.  There is no doubt that, over time, the balance of power between football employers (the clubs) and employees (the players) has tilted in favour of the latter. In England, the bargaining position of players grew with the abolition of the maximum wage in 1961. In 1963, the High Court ruled illegal the "retain and transfer" system which allowed clubs to hold on to players' registrations at the end of their contract. Until the Bosman case in 1995, however, clubs were still able to hold onto players' registrations so long as terms at least equal to their previous contract were offered. In 1995, the European Court of Justice (ECJ) ruled that this was a restraint of trade, and that Bosman had the right to an international transfer without restriction at the end of his contract. The rule was quickly extended to include domestic transfers by the respective football authorities. Some national associations, including the FA, specified that the rule would only apply for players over the age of 24, so that clubs were compensated for the development of young players. Clubs now seek either to tie a player into a new contract or transfer him before his current contract expires. Otherwise, he is free to move without them receiving a transfer fee. Martin O'Neill confirmed that the Bosman ruling had moved the power away from clubs to agents and players.[120] Steve Coppell observed that "with the Bosman thing, I think we can realistically say now, for most good players, a contract is probably at least 12 months short of the reality, because you know you have to protect that asset.[121]

83.  Against this background, agents play two roles. First, they act for players with respect to wage and other terms of employment negotiations, including within the context of transfer deals. This role is unproblematic. Given the sums involved, and the complex negotiating environment, which can now include, for example, ownership of intellectual property rights, it is in the players' interests to have professional expertise and advice to support them. Paul Elliott, formally a successful professional footballer with a number of clubs—including Aston Villa and Celtic—and whose playing career was cut short by injury, offered a defence of the outcome of agent-led pay negotiations. He emphasised that only the top few players earned vast sums—which could be justified because they were the ones filling the stadia—and that "the risk of injury is extremely high".[122] Professor Szymanski, referring back to the days of the maximum wage, commented "is it fair that the people who create the performance on the pitch get a tiny fraction of what is paid"?[123] Sean Hamil also felt that agents played a legitimate role when acting as players' representatives.[124]

84.  Agents, however, have also frequently taken on a second role, acting for clubs as a middleman during transfer negotiations. It is this role— where agents act as the gatekeeper standing between clubs and access to players—that has given most grounds for concern, with the scope it gives agents to inflate the total cost of transfer deals, fuelling the already considerable inflationary pressures in the game. Patrick Collins gave examples of agents receiving £900,000 and £1.3 million for acting as gatekeepers during a transfer deal and a wage renegotiation respectively.[125] The dilemma for clubs is that whilst, collectively, it is not in their interests to pay agent fees to help them identify transfer targets, acquire players or move on players, individually they stand to lose out if they refrain from this practice but other clubs do not. Individual clubs are, therefore, complicit in the current system, because it is advantageous to them to employ agents, including in the murky area of "tapping-up" players to see if they can be prised away from their current employers. There is also a dilemma for players in that it may be in their agent's best financial interests to work for the club which is paying them the most, rather than the club which is best (in financial or competitive terms) for the player.

85.  When an agent represents both players and clubs during the same transfer deal, his role is conflicted and potentially exploitative. This has led to calls for greater regulation. One analogy used has been with that of estate agents who act on behalf of both the home seller and the buyer, but who are regulated by the Office of Fair Trading. Current FA regulations only prohibit agents from working both for the club and the player without the latter's prior written consent. An agent could, for example, be paid by the buying club for assistance in acquiring the player. The same agent could then be paid by the player for negotiating the salary package.[126]

86.  Professor Szymanski offered a defence of agents acting for clubs, arguing that they benefited football because they had a financial incentive to seek out new players around the world, opening up the game to new talent.[127] It could equally be argued, however, that clubs can and should do their own scouting rather than pay agents (who are not coaches and normally hold no such qualifications to do their scouting and so contribute to the conflicts of interest and inflationary sums described above).

87.  A more typical view about agents was expressed by Patrick Collins, who termed them "leeches and parasites" who took money out of the game. He also observed that, during one 12-month spell in 2009, Premier League clubs paid agents a total of £70.7 million.[128] For Niall Quinn they were a necessary evil. He commented that the introduction of transfer windows "was manna from heaven for the agents who squeezed us and who continued to squeeze us in all those periods".[129] Sean Hamil suggested that when agents took money "from both sides" this led to corruption.[130] He argued strongly for far greater regulation of agents, as did the managers who gave evidence to us.

88.  Apart from tighter regulation, greater transparency has also been urged as a means of curbing the financial excesses of agents. The Football League took the initiative by requiring each club to disclose the amounts that they pay to agents over each six month period, and the Premier League introduced similar measures more recently. Gordon Taylor, Chief Executive of the Professional Football Association (PFA), Peter Coates and David Gill all argued that greater transparency in transfer dealings was important.

89.  One particular difficulty when it comes to regulating the behaviour of agents is the extent to which the deals they negotiate are international. Premier League clubs, for example, are not likely to support moves to tighten their relationships with agents, given the extent to which their performance depends upon their ability to attract the best foreign talent. It is not in their interests to agree national regulations that encourage agents to do deals with clubs in other countries, where the financial reward for them is higher. Several witnesses commented that FIFA, as the governing body of the world game, needed to take a stronger lead. David Gill, for example, observed that Manchester United operated in a worldwide market so "FIFA has to take the lead as a world governing body to make sure it is managed and appropriately controlled".[131] However, witnesses also commented that FIFA appeared to be moving away from effective regulation of agents. Gordon Taylor told us that FIFA had tried to regulate agents, but had now "put it in the hands of the national associations".[132] Richard Bevan, Chief Executive of the League Managers Association, commented, with regard to the activities of agents, that "our biggest concern is that FIFA, I think in 2012, is going to be relinquishing their regulatory control over agents, and I think that is going to be a major problem".[133] He likened the current situation to "the wild west".[134]A research paper published by Sports Nexus in 2006, which analysed the roles of the agent in football in detail, made a number of recommendations for their improved regulation.[135] It stressed that its first recommendation, prohibiting clubs from using agents, was particularly important.

90.  While we accept that agents have a legitimate role as players' representatives, there is currently too much scope for conflicts of interest and inflationary fees when agents also act for clubs. Agents should be subject to tighter regulations—particularly with regard to the "tapping-up" of players—enforced consistently on an international basis, with a particular focus on transparency of individual transactions and payments. Given the international nature of football transfers, it is a matter of great regret that FIFA has abdicated its responsibilities in this respect. We urge the FA to press for an international solution for the collective good of the game.

Competition

91.  There are indicators that the new English model is less competitive than the old. A research paper published by the Birkbeck Football Governance Research Centre in 2005 assessed competitive balance in English football—the balance between the sporting capabilities of teams.[136] It showed a more marked rate of decline in the competitive balance in the top division since the advent of the Premier League. The paper associated this decline with a widening in the gap in wage expenditure between the top teams and the rest, and inequality in broadcast revenue distribution and other revenue streams available to the top clubs, especially those qualifying for the Champions League. It also noted a decline in the effectiveness of the promotion and relegation system as a means of promoting competitive balance, which it associated with the widening income gap between the Premier League and the Championship.

92.  The research paper measured the share of points of the top five clubs against the total number of points won by all clubs. In a perfectly balanced league of 20 clubs, this ratio would be 25%. Anything greater represents a competitive imbalance. Figure 5 below, updated to bring the measure up to 2010, shows a steep decline in competitive balance since the advent of the Premier League, albeit with a partial improvement in competitive balance in the most recent seasons.

Figure 5

Share of Points of the Top 5 Clubs (C5)
Top Flight English Football, 1947-2011


93.  The report also measured inequalities between all clubs that make up the top division, recording a similar trend towards greater inbalance only partially offset by the results of the most recent seasons.

Figure 6

H-Index of Competitive Balance
Top Flight English Football, 1947-2011


94.  Finally, the report assessed the share of points won by newly promoted clubs compared to what they would win in a perfectly balanced league. The graph shows that newly promoted clubs have found it harder to gain points in the Premier League, with a partial reversal in the most recent seasons.

Figure 7

Promoted Clubs Index of Share of Points
Top Flight English football, 1947-2011


95.  These figures serve to substantiate comments made in written evidence that the richer clubs have become more dominant. Football supporter Peter Hodge observed in his written evidence that "since the establishment of the Premier League, only a very small number of teams has been able to win trophies and very few promoted teams have been able to establish themselves in the Premier League.[137] He noted that since it had been founded, only four teams had won the Premier League (including Blackburn while benefiting from the fortune of Jack Walker) and only 11 teams have won one of the three major trophies (Premier League title, FA Cup, League Cup) and that of the 50 teams promoted, 48% had been relegated after only one season. Promoted clubs which have chosen the path of financial prudence have tended not to be competitive: Burnley and Blackpool, for instance, lasting only one season.

Problems down the pyramid

96.  The success of the Premier League has incentivised financial risk-taking in the Championship. Cardiff City Supporters Trust, for example, wrote that:

Chasing that dream of Premiership football Cardiff City has over recent years, swayed from one financial crisis to another. Players were enticed with unrealistically high signing on fees and wages without the club having the long term means of paying for them.[138]

It has also had a further knock-on effect down the league pyramid. John Bowler, Chairman of Crewe Alexandra, currently in League 2, explained that his club aspired to return to Championship level but that "to stay there is difficult because of the financial pressures that come along with running a Championship club".[139] Brentford Supporters Trust noted that its club, currently in League 1, had accumulated historic debt "in pursuit of short term sporting success".[140]

The Football Creditors Rule

97.  During our inquiry, we discovered one rule in particular that appeared to epitomise the extent to which the post-Premier League football model was distorting financial priorities. Under the long-standing Football Creditors Rule, to return to league competitions the new owners of insolvent clubs must re-pay all money owed to key "football creditors". Sean Hamil explained the wider social consequences of this rule:

what you have in administration is that, because of the Football Creditors Rule, the key football creditors all get paid 100%, which means that the tax authorities get proportionately less and all the small creditors, such as St John Ambulance, do not get paid.[141]

He noted that the rule might have been justifiable in the past by the need to protect clubs, which managed their businesses reasonably effectively, from the odd exceptional reckless behaviour. The problem was that such reckless practices were now "absolutely endemic".[142] Lord Mawhinney similarly felt that the Football Creditors Rule was indefensible: "I do not know how you defend the local community where local businesses that you are supposed to be the football club of don't get paid for services rendered while a football club hundreds of miles away gets protected".[143] He also observed, though, that, under his Chairmanship, the Football League:

made a charity donation to St John Ambulance of more than £40,000, purely as a charity donation, which covered all of the administration losses that the St John Ambulance had on its books that were outstanding as a result of clubs going into administration.[144]

98.  For Dave Boyle, Chief Executive of Supporters Direct when he gave evidence, the Football Creditors Rule was a second order solution to a first order problem:

A simple problem is that football clubs are inherently unstable financially and the Football Creditors Rule is a sticking plaster to deal with that and the immorality that comes with it. It's a sticking plaster which underwrites the risks taken by clubs, with the community they are surrounded.[145]

Gary Pettit, a licensed insolvency practitioner, argued that the rule was anti-competitive, and should be amended if not removed. He suggested that it was originally intended to protect players' wages but that it had been extended to cover football clubs and all other football-related bodies. He observed that, in the case of Portsmouth "the football creditors are in the region of £30 million (to be paid in full) with other creditors receiving approximately 16 pence in the pound".[146] Olswang similarly opposed the Football Creditors Rule, as did a number of supporters trusts.

99.  We gave those with a vested interest in the Football Creditors Rule the chance to defend it. The Football League asserted that the rule was "a much maligned and misunderstood area of policy within the game".[147] It stressed the importance of the rule to protecting the integrity of the competition. It argued first that requiring all clubs always to settle their debts with others prevented individual clubs from gaining an unfair sporting advantage. It argued second that the rule prevented a "domino" effect of financial distress. Football League Chairman Greg Clarke told us that "I came in here from a corporate background thinking the Football Creditors Rule was an outrage. I came in thinking the sooner we see the back of that shoddy practice the better off we will be".[148] He acknowledged, though, that the League clubs had told them that the League was a members' club and that they could not support a member who was unable to settle its bills: "They said, 'what happens is, if they don't pay their fellow football clubs, we will kick them out of the Football League. They will cease to exist. We won't have them'".[149]

100.  We asked Greg Clarke whether, if the Football Creditors Rule did not exist, it would actually improve clubs' financial management by encouraging them to police themselves. For instance, without the safety net provided by the rule, club A would have to judge for itself whether club B offering to pay for a transfer in instalments would be able to deliver on its financial commitment. Greg Clarke objected that clubs were not well placed to make such risk assessments of other clubs: "What that will do is stop them selling to each other because they don't have the resources or the information to make a well-informed decision on counterparty risk".[150] When we pressed him though on how the Football League could both lay stress on the community benefits of football and operate a rule to the detriment of local suppliers, he responded that: "I cannot construct an argument that allows me to defend the morality of football creditors and we are working hard to find a more palatable substitute".[151]

101.  We learned the extent of Greg Clarke's challenge to come up with a substitute to the Football Creditors Rule that was palatable to his Football League clubs when we took evidence from some of them. Burnley Chairman Barry Kilby accepted that it was a difficult issue, but argued that without it some clubs would have ceased to exist. He felt that, if the rule was abolished, "I think the competition would be in great jeopardy and everybody would shrink into their shell".[152] Julian Tagg, Chief Executive of Exeter City, a supporter-owned club, observed that local suppliers would rather settle for a percentage of debt repayment and have a club they could trade with in future than force the club to go out of existence. Like Greg Clarke, however, he did profess himself to be uncomfortable with the rule, stating that he could not justify it, even though there were reasons for it.[153] Shaun Harvey, Chief Executive of Leeds United, a club which—like Exeter—has been in and out of administration, argued that the Football Creditors Rule was important on a day-to-day basis as it allowed clubs to trade with confidence: "If Leeds defaulted in this example on a payment to Crewe, which meant Crewe had to sell their players to keep in business, that cannot be a fair and rational position for Crewe to be put into".[154]

102.  Crewe Alexandra has developed a sustainable business model by developing young players at its academy—and revitalising players who have "failed" at other clubs—and then selling them on for a profit. Crewe Chairman John Bowler explained that transfer fees were essential to the existence of many clubs at the lower level and that if the Football Creditors Rule was not allowed then:

there could be a number of occasions where a football club might go into bankruptcy, but it would also take probably two or three other clubs with them because of the fact that the transfer money that ought to have come down to those other clubs hasn't come.[155]

103.  We asked the Premier League for its view on the Football Creditors Rule. Richard Scudamore noted that if a business failed, the real sanction should be expulsion, but also that, in the case of football, expulsion damaged far more clubs than the club involved. He argued that "it is absolutely essential that the clubs are forced to play each other and to play out their fixture list, and therefore it is essential that football creditors are paid".[156] He added that "there is no moral basis for saying that the St John Ambulance men or the local businesses shouldn't be paid. Of course they should, and that is our starting position—there should be no bad debt". His bottom line, though, was to defend the integrity of the competition over non-preferential creditors:

the football administrators, to protect the integrity of our league, would support the Football Creditors Rule. I understand that the integrity of our league takes precedence over the small business creditor, which is unfortunate, but I am not ever excusing people not paying their debts.[157]

We were also warned that replacing the Football Creditors Rule with a system which discouraged the trading of players would detract from the essence of the game.

104.  Interestingly, the Premier League clubs we spoke to appeared less wedded to the Football Creditors Rule. David Gill suggested that "it is a rule that has had its time".[158] He observed, too, that the Football Creditors Rule supported a more recent trend to pay for transfers over a long period, whereas previous practice of paying within the year was a better discipline. He agreed with our suggestion that removing the rule would encourage clubs to conduct better due diligence, with the likely benefit that clubs would be less likely to end up in administration. Tony Scholes was more cautious, but still accepted that "there is probably an appetite for having a fresh look at it [the rule]".[159] Niall Quinn made the point that supporters were unimpressed when highly-paid players were protected, but those on lower incomes were not: "the fan in the street meets the guy who printed the programmes who did not get paid and he sees the player driving out in the big car who was paid. I think that is damaging and we have to look at stuff like that".[160] Richard Scudamore, though, suggested that Manchester United was in a fortunate position because it could trade "almost on a cash basis with others".[161] Shaun Harvey and John Bowler similarly asserted that the role of the Football Creditors Rule was more important further down the League.

105.  FA Chairman David Bernstein spoke of the governing body providing moral leadership in football. He accepted that there was a lack of equity associated with the rule, but explained that the FA, on balance, remained supportive of it: "Why? Because the integrity of the competitions is protected by it, and without it there could well be a snowball effect if a particular club hits the buffers". [162] He expressed the hope though that the additional financial regulation that is being brought into the game would in future reduce the risk of the Football Creditors Rule being applied in an insolvency context. He also sided with David Gill on the desirability of moving away from extended terms for transfer payments.[163]

106.  As well as affecting small businesses, the Football Creditors Rule also impacts on Her Majesty's Revenue and Customs (HMRC) which no longer has preferred creditor status, and hence also loses out. Unsurprisingly, therefore, HMRC is currently challenging the rule in the courts. While Sports Minister Hugh Robertson could not comment on ongoing court proceedings, he did say that the rule was "morally quite difficult to defend".[164] He felt encouraged that our inquiry had revealed " a considerable body of opinion inside football that this rule has had its day".[165]

107.  The FA, Leagues and clubs all appeared defensive and uncomfortable about the Football Creditors Rule. They are right to be. The moral argument against it—that it harms the communities that football is supposed to serve—is persuasive on its own. There is, though, also a compelling systemic argument against it, namely that it positively encourages excessive financial risk-taking, in a system that already offers other inducements to so do, by offering a safety net to those who seek to benefit from such practices. The Football Creditors Rule should be abolished. It represents a "post facto" preferential treatment of creditors that would be illegal in the run-up to the insolvency of any business. If the football authorities do not take the initiative themselves, and Her Majesty's Revenue and Customs loses its legal challenge to the Football Creditors Rule, we recommend that the Government consider introducing legislation to abolish it.

Broadcasting rights

108.  One criticism levelled at the new English model is the extent to which the Premier League clubs in particular have become reliant on the contribution of broadcasting revenue to sustain their expenditure. According to Deloitte, broadcasting revenue now comprises more than half of Premier League club revenue. The current broadcasting deal secured by the Premier League is worth over £1,000 million (the first £1 billion revenue stream of any domestic football league in the world), with recent increases driven by higher overseas deals. International rights now make up 40% of the total value of the Premier League's new broadcasting deals.

109.  Against this background, we asked the Premier League whether the recent opinion by the Advocate General of the European Court of Justice that it was against EU law to stop broadcasters across the continent from showing football matches using foreign decoder cards posed a significant threat to its future football broadcasting revenues. The case raises a general question of whether it is acceptable under EU law to partition rights along national boundaries. Richard Scudamore replied that the Premier League had not done an assessment of the potential impact because the process was a complicated one and a final decision had yet to be made. He argued that the principle of being allowed to sell overseas rights on a territory-by-territory basis was important both to the Premier League and to foreign consumers, as the package was marketed and prepared differently according to the specific needs of the territory:

So the French, when they produce Premier League coverage in France, concentrate often on French players, French clubs. It is scheduled to avoid the French league. Similarly in Italy, in Spain, in other countries, when they show our rights, they not only concentrate on an element of the Premier League that is more relevant to their audience, but schedule it around what is a unique part of each country's culture.[166]

While arguing against any change to the selling of overseas rights, he did caution against any assumption that change would result in a drop in Premier League income. Deloitte, in its annual review makes the same point:

the financial impact [of prohibiting the partitioning of rights along national boundaries within the EU] may be more limited than many commentators have predicted. If the ruling is upheld and the Premier League was required to alter its rights selling strategy in Europe, it is by no means certain that this would reduce the value of the rights, though it may reduce access to live Premier League broadcasts for some consumers in some territories in the EU.[167]

110.  Even if the Premier League was able to insulate itself from the impact of the legal opinion, however, there could still be repercussions further down the league pyramid. Because overseas rights holders show matches on a Saturday afternoon, one potential knock-on effect, if the opinion became law, is that the current contractual 3pm blackout on live televised football in the UK—designed to stop smaller clubs from losing fans to live Premier League matches on TV—could be breached on a weekly basis. Greg Clarke told us that, from the Football League's perspective:

Our main issue is that if you imagine a small football club, Macclesfield or Chesterfield or Notts County, who are trying to get 2,000, 3,000, 4,000, 5,000, 6,000, 7,000 people to turn up to their game on a Saturday and pubs around the corner are showing Manchester United versus Liverpool live on the telly using a foreign decoder, it strikes me that that is making life more difficult than it needs to be.[168]

Julian Tagg further noted that when Exeter City games were moved from a Saturday to a Tuesday night in competition with a televised match involving big Premier League clubs "we feel that direct effect on our gates".[169] Shaun Harvey argued succinctly that "I think three o'clock on a Saturday afternoon has to be tried to be kept sacrosanct for the purpose of getting people through the turnstiles at their local clubs".[170]

111.  Henry Burgess, Head of Professional and International Sport, Department for Culture, Media and Sport, stressed that the court did not follow the Advocate General's opinion in every case. He added that the Government had "supported the broad principles put forward by the Premier League".[171] Sports Minister Hugh Robertson affirmed that he had taken the issue up with the responsible European Commissioner.[172]

112.  Although the change proposed by the Advocate General might increase viewing choice for some viewers (for example, those currently deprived of viewing options at 3pm on a Saturday), it could equally diminish choice for others (for example, if their territory was no longer served by a discrete package). While change would benefit some commercial operators (for example, pubs showing games using foreign decoders), such benefits would be at the expense of the creative rights holders—the Premier League. Given our interest in the sustainability of the game, we give considerable weight to the concerns of the Football League.

113.  The European Court of Justice's preliminary opinion with regard to the selling of broadcast rights within Europe poses a grave risk to the sustainability of clubs throughout the football pyramid. We urge the Government to use all its influence within the EU to retain the territorial selling of overseas rights.

Internal regulation

114.  We have seen how the current football governance model turns record levels of revenue into diminishing profitability and record levels of debt. The Football League and Premier League, under the auspices of the FA, have sought to bring in regulations that mitigate the risk of financial excess. To curb financial excess, and bring an end to its record of insolvencies, the Football League explained that it had pioneered the use of sporting sanctions, with a 10 point penalty applied to any club entering administration, and also the publication of club spending on agents' fees. Former Football League Chairman Lord Mawhinney explained why he had introduced the 10 point penalty:

when a club goes into administration […] that gives it a competitive advantage over the other clubs in the division because, while they are having to use their resources to pay interest, the club that has gone into administration doesn't. This is an integrity of competition issue and we addressed that by introducing the sporting sanctions and 10 point penalty.[173]

115.  The Football League explained how it had also sought to improve clubs' cost controls. In 2003, it introduced a salary cost management protocol (SCMP) for League 2, limiting spending on player wages to 60% of turnover. If clubs break the 60% limit, they are not allowed to register any further players. Chief Operating Officer Andy Williamson told us that, as a consequence:

the salary increases in League 2 are much lower than they are elsewhere, so there is evidence that it has worked in terms of ensuring that clubs are sustainable […] only one resident League 2 club has fallen into difficulty since the introduction of that salary cap. So it does work.[174]

He also observed that "we are now seeking to shadow those processes in League 1".[175] Julian Tagg, who had experienced the salary capping when Exeter City was in League 2, observed that he was keen for it to be introduced into League 1, where Exeter City now resided. Julian Bowler (Crewe) told the Committee that he was originally against the salary cap, but that now "I accept that it was one of a number of measures with which the football league is putting its house in order to ensure the wellbeing of the sport overall".[176]

116.  It is interesting that the Football League appears to have no plans to introduce a salary cap in the Championship, though it is the division where the wage/turnover ratio is highest. It appeared to be something of an irrelevance for Leeds United, which has one of the higher revenue earning potentials in the Championship because of its supporter base and large ground. Shaun Harvey observed that "60% of our turnover would mean we could spend approximately £16 million a year on wages. We spend nothing like that".[177]

117.  Barry Kilby professed himself "slightly wary of it." He wanted to retain the flexibility to spend over 60% of turnover on wages, if the club saw an opportunity to make a breakthrough:

The season we went up, when we were getting close, we increased our spending a bit and that was directors' loans. We knew what we were doing and how we'd cover if it didn't come off […]everything by diktat, I'm just a bit uneasy with.[178]

The Football League also highlighted the work it had done to ensure that its clubs paid their tax on time:

In 2009, pioneering new financial regulations relating to tax payment were introduced. These provided the League with written permission to monitor the PAYE of its clubs directly with HMRC and impose transfer embargoes in instances where clubs fail to meet their tax debts and when they fall due.[179]

The Football League judged that "these regulations have had a hugely positive impact, reducing the HMRC debt of Football League clubs from £9.6 million in August 2006 (for 29 clubs) to £0.4 million in August 2010 (for 4 clubs)".[180] It recorded that in August 2010 Championship clubs agreed additional financial reporting requirements, including the provision of future financial information relating to the subsequent season and the need for clubs to demonstrate no overdue transfer fees, compensation fees, key employee wages or tax payments:

Clubs in default, or clubs with business plans that cast doubt on their ability to fulfil fixtures or meet their ongoing obligations, will be required to submit to budget constraints, including the possibility of a registration embargo.[181]

In a significant development subsequent to the evidence session, the Football League wrote that, on 10 June 2011, their clubs had voted in principle to adopt financial fair play regulation.

118.  The Premier League pointed to a similar package of measures introduced in recent seasons. It pointed out that its rule book had begun at 142 rules and had evolved to meet changing demands and circumstances to stand at over 800 rules today. Key regulations include:

  • Clubs to submit annual accounts, interim accounts and future financial information. Premier League Board scrutinises submissions to ensure the club will be able to pay its football debts and fulfil its fixtures until at least the end of the following season. Penalty for non-compliance—transfer embargo and/or adhere to an agreed budget. Introduced September 2009. Extended to newly promoted clubs June 2010. Extended to allow further scrutiny upon change of ownership June 2010.
  • Clubs must certify every quarter that their liabilities to HMRC in respect of PAYE and NIC are up-to-date. Same penalties as above. Introduced June 2010.
  • Transparency with respect to transfer fees, including outlawing of third party ownership. Introduced June 2008.[182]

Richard Scudamore emphasised, in particular, the beneficial impact he expected the regulations requiring future financial information to be declared to have on debt levels.[183]

119.  The Premier League also pointed to the stabilising role played by the solidarity payments it made to the Football League. Direct financial support from the Premier League to lower league football includes payments to relegated clubs (referred to as parachute payments), which have recently been increased to £48 million and extended to four years, meaning that up to 12 clubs in the Football League at any one time could be in receipt of such payments. Other teams in the Championship receive an average of £2.2 million each from Premier League funds. Clubs in Leagues 1 and 2 receive an average of £0.35 million and £0.24 million respectively.

120.  FA Chairman David Bernstein was optimistic that the above regulations, together with forthcoming UEFA rules affecting clubs in European competition (covered in more detail in a later section), would make a difference to financial performance in the English model. Other witnesses were less optimistic. Sean Hamil highlighted two problems with the governance system:

there is a problem of uneven application of regulation across the industry given there are essentially three regulatory bodies, all competing to fill the regulatory space. So there is a lack of an over-arching strategy for dealing with the industry's chronic financial loss-making and its consequences. And secondly, and following on from this, regulatory initiatives tend to be reactive and piecemeal, rather than proactive and strategic.[184]

He observed that the FA, Premier League and Football League had been slow to appreciate the need for greater regulation to manage the new model:

in 1999 the FA, Premier League and Football League articulated their attitude to demands for a more interventionist approach as follows: 'the football authorities do not believe that the overall well-being of the game will be helped by new layers of regulation or bureaucracy'.[185]

He noted that events—notably the manner in which Leicester City had achieved promotion to the Premier League at the end of the 2002/03 season having shed significant debt through the administration process—had pushed them into introducing points penalties for clubs that entered into financial administration.

121.  Football fan and commentator Andy Green was concerned that the current self-regulatory models in England did not contain any stipulations concerning how much football clubs could borrow. He also noted that, while the Premier League rules now included provision to provide future financial information, the new rules relied too heavily on auditors' qualifications or part qualifications of accounts as the early warning mechanism. He noted that Portsmouth's auditors, Grant Thornton, did not qualify the accounts in the year prior to the club's collapse. Indeed, there was probably no need for them to have done so under their remit.

122.  The FA acknowledged that "traditionally English football's approach [to rule changes] has been to be reactive" and that:

It is reasonable to consider in the future whether a greater balance between this approach, and a more proactive oversight approach that maintains the coordinated control of the game within the principles of consensual self-regulation could be achieved.[186]

Parachute payments

123.  One element of the Premier League's solidarity payments —the payments made to relegated clubs to compensate for loss of income (dubbed "parachute payments")—arguably has a destabilising effect now that the Premier League has increased their value. Lord Mawhinney, former Chairman of the Football League, explained that:

Parachute payments were instigated because the salary levels in Premier League clubs were so much greater than in Championship clubs that, without some transitional funding, Premier League clubs that got relegated would simply just head straight into administration or just tumble down the Football League and that did not seem to be fair.[187]

The obvious solution would appear to be to insert a relegation clause into players' contracts, rather than initiate parachute payments which could be seen as a reward for failure. However, Shaun Harvey, Leeds United Chief Executive, explained why this was not as easy as it might first appear:

I'd challenge anybody to sit in front of an agent and a player and say to them, 'we want to sign you for three years. We're a Premier League club. We're going all out to stay at this division. However, if we fail we want to reduce your wages by half'. To which the player and his agent say, 'Well you're not really that confident that you're going to stay in the Premier League then are you?'[188]

Barry Kilby affirmed that in a competitive market, if one club sought to impose such a clause, other clubs would seek to attract players by not imposing it.

124.  Parachute payments were initially for two years, but in May 2010 the Premier League extended parachute payments from two to four seasons. Clubs relegated at the end of 2010/11 will receive around £48 million spread over four seasons. By contrast, during 2004/05-2006/07 parachute payments were £6.5 million per season, with an increase in 2007/08 to £11.4 million. Richard Scudamore made the point that if you want clubs to be competitive when they enter the Premier League, you need to protect them when they go down. He felt that the parachute payments were justified because they helped ensure the sustainability of the clubs involved, and suggested that there was no evidence that they distorted competition as relegated clubs did not automatically come up the following season. In its written evidence, the Premier League included parachute payments within its definition of solidarity payments to lower league football.

125.  Other witnesses were concerned about the impact of parachute payments on competition in the Football League. Patrick Collins was suspicious that the Premier League was seeking to protect its own:

I do agree that the Premier League, deep down, wants to be a closed shop. […] The parachute payments involve going down with £18 million in your pocket when everyone else has got £1 million and so the likelihood is […] they will come straight back.[189]

126.  In his evidence, Phil Gregory argued in relation to parachute payments that "the net result is the non-recipients spending more money they don't have in an attempt to remain competitive in the promotion battle, worsening an already precarious financial situation".[190] Lord Mawhinney defended the principle of parachute payments but argued that:

The present level of parachute payments are going to undermine the integrity of competition in the Football League. They are going to do that because the amount of money—£16 million, £16 million, £8 million and £8 million over four years—bears very little relationship to the salary issue that was the original case.[191]

Greg Clarke, Chairman of the Football League, called parachute payments "one of the most contentious issues that the Football League has debated".[192] He stressed that "if we get a situation where the clubs that are relegated are automatically promoted, that is not in the interests of a fair competition because you cannot win unless you have access to Premier League funding".[193]

He expressed the hope, though, that the relegated clubs would use parachute payments to straighten out their finances, rather than gamble on maintaining a high wage bill to secure early promotion: "interestingly, the trend is changing. This season, because of the large debts some Premier League clubs have, they spend quite a lot of that parachute payment servicing and paying down their debt".[194]

127.  The new financial regulations adopted by the Premier League and the Football League mark a welcome shift in emphasis to engaging with the financial challenges inherent in the current model of English football. There are, however, legitimate concerns as to whether they go far enough or will be consistently applied, particularly in the Championship where there is a risk that the increased parachute payments from the Premier League to relegated clubs will have a destabilising effect on other clubs as they try to match their spending power. We urge the FA to broker discussions with the Premier League and Football League to review the balance between parachute payments and solidarity payments.

The impact of UEFA

128.  At the level of European competition, the Union of European Football Associations (UEFA) is seeking to strengthen its own licensing system. UEFA's Club Licensing and Financial Fair Play Regulations, published last year, state UEFA's aim to achieve financial fair play in its club competitions and in particular:

  • to improve the economic and financial capability of the clubs;
  • to place the necessary importance on the protection of creditors;
  • to introduce more discipline and rationality in club football finances;
  • to encourage clubs to operate on the basis of their own revenues;
  • to encourage responsible spending for the long-term benefit of football; and,
  • to protect the long-term viability and sustainability of European club football.[195]

129.  Clubs qualifying for UEFA club competitions must apply for a licence from a UEFA member association. UEFA's licensing system is of longstanding, but the decision to add the new financial fair play provisions takes it to a new level. From the 2013/14 season compliance with financial fair play regulations will be monitored as part of the licence criteria. UEFA's Club Financial Control Panel will determine whether a club is compliant on the basis of financial information provided by clubs and assessed by the relevant UEFA member association (eg in England, the FA, though the FA may in turn delegate responsibility to the Premier League).

130.  If the Club Financial Control Panel concludes that a club is non-compliant, this does not automatically mean that the club will be excluded from the competition: there are a range of sanctions available from warnings to a transfer ban to exclusion. The club will, though, be required to provide additional financial information, including a plan for future compliance, and may be subjected to more intensive scrutiny. Clubs will also be monitored more closely if there are warning signs such as recording a loss in any year; spending more than 70% of revenue on wages; and having overdue football-related payments or tax debts.

131.  There are two key provisions: a requirement to have no overdue payments as at 31 March the preceding season; and the requirement for clubs to break even over a rolling period of two to three years. Broadly, clubs qualifying for UEFA club competitions in 2013/14 will need to produce an aggregate break-even result over the previous two annual financial reporting periods ending in 2013 and 2012. In subsequent seasons, the rule will cover the preceding three reporting periods.

132.  UEFA has set an acceptable deviation from the break-even requirement, which reduces over time. For the monitoring period assessed in the 2013/14 and 2014/15 seasons, clubs can go into deficit to the tune of €45 million, if this is financed by owners and/or related parties. In seasons 2015/16, 2016/17 and 2017/18 the equivalent deficit figure is €30 million. UEFA has undertaken to set a lower amount in the following seasons. Clubs qualifying from outside the top division, and clubs with annual relevant income and expenditure below €5 million, are exempt from the break-even requirement.

133.  UEFA has also suggested that it is likely to look favourably on clubs that are moving in the right direction towards breaking even—for instance if overspend is caused by commitments on wages and transfer fees made before June 2010—particularly in the early years of the financial fair play regulations, implying a further level of acceptable deviation.

134.  Not all income and expenditure is relevant for the break-even calculation. On the revenue side, non-monetary items or certain income from non-football operations is excluded. On the expenditure side, expenditure on stadia, youth development and community development activities is excluded. UEFA has also sought to close a loophole, through which wealthy owners could inject more revenue or reduce expenditure by agreeing favourable deals with other companies owned by them or related parties. UEFA's regulations state that relevant income and expenses from related parties must be adjusted to reflect the fair value of any such transactions.

135.  William Gaillard, adviser to UEFA President Michel Platini, explained the rationale behind UEFA's initiative:

We felt, in particular, that the growing inflation of wages and transfers, the large number of clubs facing an unsustainable debt burden and the fact that a number of clubs Europe-wide were going into administration, meant that the system needed some reform [...] we felt that, through our licensing mechanism for our own competitions, we could introduce some order and more rationality into professional football.[196]

He assured us that the monitoring of the new measures would be transparent, and would be conducted by an independent committee. He accepted, though, that the test would come if a major European club fell foul of the new rules. He observed that "if we sanction them, it will mean that the rules have worked" while noting that "a better way for the rules to work is for the club suddenly to be unsanctionable and complying with the rules and this is our dearest wish".[197]

136.  Much of our evidence was very favourable to the UEFA initiative. For Sean Hamil the rules are absolutely critical to improving the financial governance of the game. Lord Triesman also welcomed the initiative, while the view from current football insiders also appeared positive. Richard Scudamore advised that the Premier League was entirely supportive of the break-even concept. David Gill told us that Manchester United was "very comfortable with financial fair play […] and we will operate within it".[198] Peter Coates was similarly contented, though he stressed that it would need to be implemented consistently across Europe, and Niall Quinn noted that early fears that UEFA was out to reduce the competitive advantage of Premier League clubs had been allayed.

137.  We have received a number of proposals for further steps that should be taken to address the weaknesses inherent in the current English football model. One theme has been the need for greater redistribution of revenue, both to increase competitiveness and safeguard the future of the game by strengthening the grassroots. The Football League observed that it is vitally important that football does everything possible to ensure that wealth is fairly distributed throughout the game. It stressed, in particular, the important role played by the League Cup and the solidarity agreement in achieving this, and the need also for action to reopening the domestic transfer market, and ensure a fair compensation system for the development of young players.[199]

138.  A second key theme has been the need to move to a formal licensing system. For some, this would simply involve applying the UEFA fair play regulations to national leagues. Sean Hamil, for example, argued strongly that:

They should be applied in every League in Europe independently because what happened is that if you are overspending on players you are not spending on disabled facilities for local fans, you are not spending money on that family facility, you are not spending money on that outreach into the community.[200]

139.  Greg Clarke suggested that UEFA-type fair play regulation might be applicable to the Championship:

I believe it offers a template potentially for the Championship to adopt, to say if we have to break even on a three-year period that is just a soft way of introducing a wage bill cap because that is your biggest amount of disposable cash, what you spend on your wage bill.[201]

Subsequent to the session, the Football League clubs did vote in principle to adopt financial fair play regulation.

140.  Richard Scudamore, however, cautioned against rushing into requiring that the regulations should apply in national leagues. He warned that appropriate leeway was required at every level to facilitate competition:

When you have smaller clubs that are aspirational—coming up from the Championship, for example—why shouldn't those clubs, if they have the owners who have those funds available, be able to invest them to make their club slightly better to get them into that thing?[202]

141.  The UEFA initiative does appear to have a good chance of making a positive difference to spending patterns within the Premier League. The fact that Football League clubs have voted in principle to adopt financial fair play regulations also holds out the promise of more prudent spending patterns in the Football League and, most significantly, in the Championship. We will follow with interest the Football League's plans for adopting financial fair play regulations: It will need to find a balance between curbing unsustainable expenditure on wages and allowing the ambitious owners of smaller clubs sufficient flexibility to fund a competitive squad.

142.  The manner in which financial regulations continue to be introduced serves to emphasise the disjointed nature of the English governance system. Different rules and different interpretations of rules apply, with different agencies applying them depending upon whether a club is playing in European competition, the Premier League or the Football League. The FA should take the lead in ensuring that consistency of regulation is a priority for the English game.

The German model

143.  A second approach, working very much with the grain of the UEFA financial fair play initiative, would be to copy the domestic licensing model practised in Germany. This option was urged by a large number of submissions. According to Christian Müller, who was Chief Financial Officer of the German Football League (DFL), a member of the Managing Board of the German League Association (Ligaverband) from 2007 until 2010 and Member of the Board of the German Football Association (DFB) amongst football roles, the licensing system adopted in Germany is a key reason why there have been no insolvencies in the German national leagues (Bundesliga) since the first German Bundesliga was established in 1963. He outlined the approach adopted in Germany:

In essence, the licensing procedure requires clubs to submit economic data for scrutiny by the football authorities, thereby ensuring an openness and transparency to the business aspect of the game that is without parallel across Europe. The backbone of the system is to force clubs to reduce overspending by implementing specified planning procedures and seasonal application for a licence.[203]

For a club to receive a licence to compete in the relevant Bundesliga, it must be solvent and able to demonstrate sufficient liquidity to last the next season. He detailed the areas assessed:

  • Assets;
  • Receivables;
  • Cash and bank balances;
  • Liabilities/provisions;
  • Current overdraft account facilities;
  • Loan commitments;
  • Projected profit and loss statements, including planned income from ticket sales, advertising and transfers and planned payroll costs for match operations; and
  • Cash inflows/outflows from investing and financing activities.

Additionally, net equity must be present at the end of each season or sanctions will follow.[204]

144.  Christian Müller also explained how the licensing regulations were applied in Germany. The process starts with a pre-season examination of accounts and continues with in-season confirmation of economic capability. Licences can be granted on a conditional basis, allowing the football authorities to pay close attention to problem clubs. Sanctions available if the club fails to meet the economic criteria include fines, deductions of points, a transfer embargo and, ultimately, expulsion from the three division national league structure. He argued that the strengths of the Bundesliga—profitability, competitive parity, and community work—were all underpinned by the licensing model and the ownership structure (considered in more detail in chapter 5). A second submission from Germany, from Hamburger SV Supporters Club, made similar points:

All of the regulations relating to ownership and licensing are recognition that football clubs must act as responsible entities, and that reckless spending cannot be a substitute for a long-term business strategy geared towards stability, not merely short-term success.[205]

145.  For Müller, one of the reasons why the German licensing system works so well is that it has popular backing. Judging by the evidence we received, the introduction of a similar licensing model here would also have the backing of supporters. In their evidence, Andy Green, Manchester United Supporters Trust, the Clarets Trust, Wimbledon Football Club Supporters Society, Bristol City Supporters Trust, Brentford Supporters Trust, Fulham Supporters Trust, Bradford Supporters Trust, Supporters Direct, Dave Boyle and Steven Powell from the Football Supporters Federation, all advocated a licensing model, most citing Germany as a template.

146.  There were, however, a few notes of caution. Professor Szymanski observed that the German model had not produced the same levels of popularity or competitive and commercial success as the English one. He also argued that club finances in England were more transparent than they were in Germany because of the obligations on limited companies to lodge accounts with Companies House.

147.  Richard Scudamore asserted that the newly improved Premier League rule book already constituted a licensing system: "the reality is we have a licensing system. We have a very much more robust licensing system now than we did two or three years ago. Our rulebook is effectively the licensing system for clubs within our league".[206] While he was prepared to consider further improvements to the Premier League rule book, he made it clear that he saw evolution of the current self-regulatory system as the best way forward: "I would ask you to look at the evidence of the evolution of our rulebook. We have a track record of moving the rulebook on and I think the best people to do that are us".[207] He also emphasised the extent to which the Premier League and Football League rule books were now aligned, though he accepted that the recent alignment exercise still needed "a very early ironing out".[208] William Gulliard, however, appeared less convinced that the English self-regulatory model amounted to a licensing system: "They have bits and pieces of licensing. They don't have a licensing system over the whole professional game. It is divided. It is not streamlined as such. There is nothing like what exists in the Netherlands or in Germany".[209]

The FA also appeared somewhat ambivalent but not totally unreceptive to the idea of a formal licensing regime. Alex Horne, General Secretary of the FA, warned that "the danger with an overly formal licensing scheme is it becomes bureaucracy for the sake of it".[210] He accepted, though, that the time had come to:

reach across all four Leagues and look at appropriate cost control measures in all four Leagues and listening to the Chairman of the Football League's evidence. I think that would chime with their position and their concerns regarding debt in their clubs.[211]

He further observed that: "If we were going to go down a more formal hard financial regulatory model we would not need some form of overarching licensing system to make sure it was transparent, auditable and fair".[212] He expressed a preference for what he termed a hybrid model, that was consistent with the financial fair play model adopted by UEFA as part of its own licence system for competing in its European competitions. When we asked his Chairman whether the Leagues agreed on a move to a licensing system, he replied:"Well, we will see. No, I'm not saying they agree that at the moment and we have yet to begin to explore some of these things, but I'm hopeful".[213]

148.  We travelled to Germany to understand at first hand how the German licensing model works. We heard that the system had weaknesses. There were suggestion that some clubs were "too big to fail" and received preferential treatment. Some also felt that the licensing system focused too much on a club's ability to make it through the coming season, rather than addressing financial problems that build up over time. It is not the case that all German clubs are, or have always been, well-run. Some clubs have experienced financial difficulty, but levels of debt are generally lower and the number of insolvencies and crises fewer. There was a genuine belief that the licensing system imposed more discipline and did more to curb financial excesses across the board than the English model. One key point made was that the licensing authorities sought to work with the clubs to prevent financial failure.

A licensing model for England

149.  Judging by Deloitte's statistics on profitability, debt and wage levels, and the travails of a number of individual clubs, it appears that the English regulatory authorities have struggled to keep pace with the new governance challenges arising from the systemic changes following the moves in the 1980s towards greater commercialisation and the establishment, in the 1990s, of the Premier League. There is also the recent track record to consider: Premier League Portsmouth went into administration in 2010, and at least two of the teams relegated from the Premier League at the end of the 2010-11 season (Birmingham City and West Ham United) are experiencing financial problems. In the Football League, League 1 Plymouth Argyle went into administration in March 2011. The Football League's commitment to transparency did not provide clarity of the ownership of Leeds United until the club made further announcements.

150.  While we acknowledge that financial regulations have been tightened of late, we are not convinced that even the new rules recently adopted by both the Premier League and the Football League are by themselves sufficient to curb English football's excesses. Often their rules appear to be in response to events rather than being proactive. It is right that clubs going into administration should be deducted penalty points, but it is important that the FA adopts more effective pre-emptive measures that anticipate rather than simply follow events.

151.  We recommend the introduction of a formal licensing model imposed rigorously and consistently throughout professional English football to underpin the self-regulation measures already introduced by the Premier League and the Football League. The licensing model adopted should both review performance and look to promote sustainable forward-looking business plans.

Administering the domestic licensing model

152.  Thought needs to be given to the respective roles of the Leagues and the FA under the licensing system proposed. In Germany, The German Football League (DFL), which is an association of member clubs responsible for running the German Bundesliga competition, is responsible for formulating and applying the licensing model. Clubs in the first and second Bundesliga apply to the DFL for a licence to re-enter their competition the next season. The strength of this system is that the member clubs themselves endorse the licensing rules and so are more likely to comply. The weaknesses are that it can lead to conflicts of interest (how hard are member clubs going to be on one of their own?); weaker specifications; and concerns about the rigour and consistency with which the system is applied. Steven Powell observed that the French had adopted a different "Chinese Wall" model for their licensing system:

It's essentially a board with a Chinese wall within the French professional league—the equivalent of the Premier League of the Football League here—which has autonomy to go into clubs and to basically implement special measures. It's not perfect—there are some financial problems in the game in France at the moment—but it does show that you can create within the governing or the competition-organising body in France something which has sufficient autonomy to exercise real financial control, because the sporting pressures are always there to spend more money.[214]

153.  In England, the situation is complicated by the fact that two membership organisations—the Premier League and the Football League—carry out the league competition organising role performed by the DFL in Germany. Also, the DFL differs from the Premier League in that it has a supervisory board with a number of DFB Board members on it, and so arguably has more internal checks and balances against conflicts of interest. One option, to ensure consistency and guard against the conflicts of interest within the English model, would be to give the FA a strong scrutiny role in the licensing process. For governance purposes, there is an important distinction between the relationship the clubs have with their League and the FA. The clubs ultimately own the League organisation they play in. They are members of the FA. The Leagues are, therefore, in principle in a weaker position to exercise effective control over the financial affairs of the clubs than the FA. In practice, however, this would be something of a new departure for the FA, which has not historically played an important role in off-field regulation. A case though can be made for concluding that it needs to become more pro-active in the wider interests of the game, and that, were the FA to exercise an oversight and scrutiny role over a licensing system, this would assist robust financial governance in English football.

154.  Lord Burns, who, having conducted a review of the FA, is well positioned to comment on its roles in the game, argued that the FA had been too passive in the face of the growing financial governance challenges arising from the restructuring of the English game:

It [the FA] has operated a sort of subsidiary model as far as the management of the leagues is concerned. We now have the slightly strange situation where the lead has been taken by UEFA in terms of the fair play rules and they are beginning to carve out an approach to it. Our FA, I have to say, looks to me to be being dragged along behind that rather than, as one might have expected given the historical position of the FA, having been more in the lead on these issues.[215]

Lord Triesman, former Chairman of the FA, similarly commented that:

I have no doubt that in the course of hearing evidence you will hear people who will say "The FA does do all of those things and it is not realistic to say that they don't, and here is the book that sets out all the regulations". I am just saying at first-hand experience that it has subcontracted and does not question the subcontractor in those key roles.[216]

155.  To understand why the FA has adopted such a passive role, and to understand the difficulties it has in re-asserting itself, there is a need to appreciate the nature of the relationship between the FA and the Premier and Football Leagues. The history of the FA and Football League can be seen as a series of "turf wars", with the Football League seeking to defend its right to run its competitions as it saw fit. It has been suggested that one reason the FA endorsed the formation of the Premier League was to reduce the power of the Football League.[217] The advent of the Premier League saw a two way struggle become a three way fight, with the Premier League's growing financial dominance tending to give it the upper hand. It is important to note, in particular, that this power struggle is reflected within the Board of the FA, which contains three Premier League and two Football League representatives. Against this background, it is not surprising that Lord Triesman should assert that the Premier League guarded its autonomy on self-regulation very strongly.

156.  Lord Triesman cited, in particular, the role played by the professional game in ensuring that a document he had prepared on behalf of the FA for the Government— which advocated, among other things, a stronger regulatory role for the FA—was not submitted. Ian Watmore, former Chief Executive of the FA, also observed that the FA had a sometimes prickly relationship with the Premier League:

On other issues we might be miles apart or have a disagreement over whose responsibility it was. I think that my Chairman at the time mentioned in his evidence that football regulation, in the sort of financial regulation sense, was deemed by the leagues not to be something for the FA, it was deemed to be something for them and Lord Triesman disagreed with that and that is where the tension first emerged between them.[218]

In later evidence, the Premier League disputed Lord Triesman's account. Richard Scudamore also commented that "we at operating level have a very good relationship with the Football Association. We are always prepared to discuss things and I think the way it works now is good".[219] The implication is that the Premier League is content with the status quo.

157.  There are, however, sound reasons to argue that financial regulation of football clubs in England would benefit if the FA took a more active role, given its position as governing body, and the greater distance between it and the clubs. Sean Hamil argued that:

What is necessary is to recalibrate the relationship between the two leagues and the FA and, in my opinion, to allow the FA to get on with its historic role of governing the game in the wider interest. The job of the leagues is to run two successful leagues. It is not to govern football.[220]

Ian Watmore told us that "I think we should set the environment at an FA level and then let the individual competitions, in this case the leagues, determine precisely how to implement that, their own roles within the rules that they impose upon the clubs that play in the league".[221]

158.  Lord Triesman set out his stall in the previously unpublished document which we have now included in the written evidence received for this inquiry. Most significantly, David Bernstein, current Chairman of the FA, also appeared receptive, telling us that:

We believe that the FA's supervisory role should be increased. I think perhaps we have allowed some of these things to drift away from us. The way the Leagues are run with self-regulation we think is absolutely right; we wouldn't want to change that or try and pull that back but I think our supervision over the way that is done could be upgraded.[222]

Alex Horne explained how the FA was already taking this intent forward, observing that David Bernstein had already called a meeting with the Premier League and Football League to:

make sure that we are sitting down and understanding some of these whole game issues and making sure that we are agreeing our approach: if you like, uncluttering some of the regulatory framework that exists, making sure our roles and responsibilities are clearly defined across each of those bodies and making sure that we're adopting the right strategic approach when it comes to, for example, financial regulation of clubs or perhaps future youth development measures.[223]

159.  Hugh Robertson, the Sports Minister, made it clear that he could see the advantages of a more formalised licensing system and that he would expect the FA to administer it. However, echoing the concern of much of the evidence to this inquiry, he also attached a caveat:

the slight reluctance or the slight sense of caution that you would get is that everybody needs to be convinced that the FA it itself properly governed and able to carry out that function before it was given that part […] I deal with a number of their executives and there are some very, very good people there. I think they would welcome this if they were given this opportunity, but it could only come after they had reformed their governance.[224]

160.  For an English licensing system to deliver the prudential benefits intended, it is essential that it is applied, and is seen to be applied, rigorously and consistently across the professional game. All clubs, and the leagues themselves, are affiliated to the FA, the governing body of the game. We recommend, therefore, that the FA takes responsibility for establishing a licensing system, takes on a strong scrutiny and oversight role in the licensing process and makes the final decision on contentious licence applications.


94   Deloitte Sports Business Group, Annual Review of Football Finance: Pressure to change, June 2011 Back

95   Ev w62 Back

96   Ev 246 Back

97   Q 157 Back

98   Ibid Back

99   Q 194 Back

100   Q 195 Back

101   Q 624 Back

102   Ev 210 Back

103   Q 81 Back

104   Q 282 Back

105   Ev w31 Back

106   Q 16 Back

107   Q 4 Back

108   Q 165 Back

109   Q 152 Back

110   Q 289 Back

111   Q 289 Back

112   David Conn, The Beautiful Game?: Searching for the soul of football, London (2005), p 150 Back

113   Q 385 Back

114   Q 402 Back

115   Q 427 Back

116   Q 291 Back

117   Q 292 Back

118   Q 32 Back

119   Data compiled using the pre-tax-profit (loss) of clubs that were in the top flight league for any year between 1947-2004 for which data were available from Companies House. The database comprises 56 clubs although there are missing observations for some years and some clubs. Back

120   Q 437 Back

121   Q 438 Back

122   Q 123 Back

123   Q 8 Back

124   Q 9 Back

125   Ibid Back

126   Matthew Holt, Jonathan Michie, Christine Oughton, "The Role and Regulation of Agents in Football", Birkbeck University of London, Research Paper No.1, 2006  Back

127   Q 9 Back

128   Ibid Back

129   Q 209 Back

130   Q 9 Back

131   Q 212 Back

132   Q 120 Back

133   Q 433 Back

134   Ibid Back

135   Matthew Holt, Jonathan Michie, Christine Oughton, "The Role and Regulation of Agents in Football", Birkbeck University of London, Research Paper No.1, 2006  Back

136   Jonathan Michie and Christine Oughton, Competitive Balance in Football: An Update, Football Governance Research Centre, Birkbeck University of London, 2005 Back

137   Ev w8 Back

138   Ev w21 Back

139   Q 277 Back

140   Ev w68 Back

141   Q 1 Back

142   Q 17 Back

143   Q 240 Back

144   Ibid Back

145   Q 343 Back

146   Ev w19 Back

147   Ev 236 Back

148   Q 92 Back

149   Ibid Back

150   Q 94 Back

151   Q 98 Back

152   Q 293 Back

153   Q 294 Back

154   Q 296 Back

155   Q 298 Back

156   Q 663 Back

157   Ibid Back

158   Q 202 Back

159   Q 205 Back

160   Q 207 Back

161   Q 664 Back

162   Q 481 Back

163   Q 484 Back

164   Q 785 Back

165   Q 787 Back

166   Q 674 Back

167   Deloitte Sports Business Group, Annual Review of Football Finance: Pressure to change, June 2011, p 29 Back

168   Q 78 Back

169   Q 309 Back

170   Ibid Back

171   Q 791 Back

172   Q 792 Back

173   Q 242 Back

174   Q 86 Back

175   Ibid Back

176   Q 311 Back

177   Ibid Back

178   Q 311 Back

179   Ev 233 Back

180   Ibid Back

181   Ibid Back

182   Ev 216 Back

183   Q 670 Back

184   Ev 250 Back

185   Ev 250 Back

186   Ev 190 Back

187   Q 229 Back

188   Q 315 Back

189   Q 11 Back

190   Ev w97 Back

191   Q 229 Back

192   Q 60 Back

193   Ibid Back

194   Ibid Back

195   UEFA, UEFA Club Licensing and Financial Fair Play Regulations, Edition 2010, p 2 Back

196   Q 713 Back

197   Q 733 Back

198   Q 194 Back

199   Ev 237 Back

200   Q 4 Back

201   Q 85 Back

202   Q 656 Back

203   Ev w202 Back

204   Ibid Back

205   Ev w199 Back

206   Q 630 Back

207   Q 643 Back

208   Q 648 Back

209   Q 718 Back

210   Q 466 Back

211   Ibid Back

212   Ibid Back

213   Q 467 Back

214   Q 339 Back

215   Q 34 Back

216   Q 33 Back

217   David Conn, The Beautiful Game? Searching for the Soul of Football, (London 2005) p 53 Back

218   Q 351 Back

219   Q 643 Back

220   Q 6 Back

221   Q 377 Back

222   Q 463 Back

223   Q 466 Back

224   Q 796 Back


 
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© Parliamentary copyright 2011
Prepared 29 July 2011