House of Commons - Football Governance Follow-Up - Culture, Media and Sport Committee

Football Governance Follow-Up - Culture, Media and Sport Committee Contents

4 Financial Matters

Problems caused by levels of debt

75. The financial sustainability of clubs continues to be called into question as many continue to declare huge debts amid doubts that some, at least, may be able to service them. Over the past few months individual clubs as well as the leagues have become more open about the need for financial reform. Twelve out of the twenty clubs in the Premier League ended the 2010-11 season in debt, with Manchester City and Chelsea declaring debts of £197 million and £68 million respectively . In an interview for the BBC in May 2012, Richard Scudamore said that he was not concerned about current spending—specifically by Manchester United.[96] While many clubs may be able to service their debts, as we noted in our 2011 Report, since 1992 when the Premier League was introduced, over 50% of Football League clubs have gone into administration and some have been through the process more than once. In February 2012, Portsmouth Football Club entered administration for the second time in three seasons. Shortly afterwards, having accrued debts with HMRC that it was unable to settle, Rangers Football Club, which was regulated by the Scottish Football Association, entered administration and was later liquidated with its business and assets transferred to another corporate entity in July 2012.

76. The joint response stated that Football League clubs had made 'significant progress' towards creating a more sustainable economic model in recent months.[97] Mr Scudamore told us in July that Portsmouth had been a "wake-up call" for the Premier League, but argued that the 'owners and directors' test now in place and the requirement for current as well as future financial information to be disclosed would prevent the same situation from reoccurring. When we asked whether the situation at Rangers could be repeated in England, Mr Scudamore said that the Scottish system did not have the same "rigour of rules" as the FA and that the situation with Rangers could not happen now in the English game.[98] He later clarified this, saying that the Scottish system did not (at least at the time Rangers got into financial difficulties) have the same systems as were now operated by the Premier League. He added that HMRC had an important role to play in preventing clubs from encountering financial difficulties by not allowing clubs to build up debts with the taxpayer.[99]

77. Many of those who commented on the joint proposals from the football authorities were disappointed by their failure to address the fundamental issue that, in their view, there remains too much debt in the game and too many incentives for clubs to continue to take on more. RamsTrust observed that:

The word DEBT is never mentioned in the response—and this came at the end of the week where the biggest British club ever to enter administration (Glasgow Rangers) was being ripped apart by administrators, whilst Portsmouth and Port Vale were struggling to survive until the end of the season.[100]

Fulham Supporters' Trust suggested that the response indicated that the football authorities were unconcerned about the levels of debt in the game, saying that:

The failure to address the toxic issue of debt is indicative of a rather blasé attitude to one of the most significant 'ills' in the English game. If anything, the extensive 'financial doping' widespread in the Premier League is treated, irrationally, as a joyous consequence of increasing revenue gleaned from television broadcasting rights.[101]

78. One possible approach to creating a more sustainable economic future for the game lies in the principles that underpin the UEFA Financial Fair Play framework, namely that clubs should operate within sensible financial parameters that do not put their long-term participation in the competition at risk. In essence, the Financial Fair Play Regulations are designed to prevent clubs from spending more than they earn over a period of several years.

FINANCIAL FAIR PLAY

79. The Financial Fair Play (FFP) Regulations, introduced by UEFA, were agreed after lengthy consultation in May 2010 and are now being implemented as a part of the UEFA competition licence. They already apply to Premier League clubs which take part in UEFA competitions. In addition, Premier League clubs have to disclose future financial information as well as annual accounts, allowing the league to assess whether a team is able to pay its football debts.

80. In June 2011 the principle behind these regulations—namely that clubs should "operate within sensible financial parameters"—was given the support of clubs in the Football League;[102] but it was not until April 2012 that all the clubs in the league agreed that an FFP framework should be adopted across all teams by the beginning of the 2012/13 season. Under this framework individual divisions have been permitted to develop their own rules to prevent excessive spending. While Championship clubs chose a "break-even" model based on UEFA FFP regulations, leagues 1 and 2 selected to use the Salary Cost Management Protocol (SCMP) in order to limit spending on players. David Lampitt of Supporters Direct said that steps taken by the leagues, in particular the Football League, with regard to UEFA's financial fair play rules were very positive, arguing that intervention was always better than sanction in terms of financial management of clubs.[103]

81. Richard Scudamore told us that, at the Premier League annual general meeting on 31 May 2012, clubs had been seriously considering the possibility of implementing FFP across the league in the context of discussions on how the most recent share of broadcasting revenue should be spent.[104] He explained that the clubs had agreed to form several working groups to discuss the issues involved in more detail. He expected Premier League clubs to be able to sustain themselves with the funding which would be available from the latest broadcast deal and for them to spend some money on infrastructure as well as reducing losses, thus increasing their sustainability.[105]

82. Following the meeting held in May, proposals for possible controls on club spending were presented to the Premier League in September.[106] Possible measures include a requirement for clubs to break even every year or face sanctions much like the Financial Fair Play rules. Dave Whelan, Chairman of Wigan Athletic, reportedly said that:

Some clubs are spending way more than they can afford and get into trouble—look at Portsmouth. The Premier League is so big and powerful and there is so much money around that the clubs try and chase it. Something has to be done, so we support these measures.[107]

83. While clubs competing in different divisions and leagues are subject to different FFP regulation, there is the potential for difficulties to arise when a team moves from one league to another. For example, a club relegated to the Championship from the Premier League would not, as the rules are currently envisaged by the Football League, be subject to the sanctions available under the Championship's FFP rules for the first season following relegation unless they were promoted at the end of that season. The imposition of penalties by the Football League for clubs which are promoted to the Premier League while in breach of their former division's FFP rules also requires the cooperation of the Premier League. It is not presently clear how this type of situation would be resolved and whether the FA would be in a position to step in and adjudicate.

84. We are encouraged by recent significant progress by clubs towards adopting the Financial Fair Play framework introduced by UEFA. However, we remain concerned about the levels of debt within the game. We see little evidence that clubs will spend significant amounts of the funding available from the latest broadcasting rights settlement on increasing their sustainability rather than on players' salaries and transfers. We await with interest clubs' spending plans for the next season. We expect the Financial Fair Play rules to be enforced. If they are not enforced, then we consider that legislation will be required to impose some financial discipline on clubs.

The Football Creditors Rule

85. In our 2011 report we strongly urged that the Football Creditors Rule (FCR) be abolished as unfair and damaging.[108] The FCR requires that, in order to be readmitted into a league competition, an insolvent club's new owners must repay the money owed to all so-called 'football creditors' (essentially, other football clubs).

86. On 25 May 2012, the challenge brought by HMRC against the Football League's use of the FCR was dismissed in the High Court on the grounds that HMRC had failed to establish in this case that the use of the FCR infringed the principle that debtors should not withhold assets from the insolvency process and the FCR allowed all creditors in the same class to be treated equally. However, Mr Justice Richards commented that the Football League "should not regard the result of this case as an endorsement of its approach to football creditors",[109] adding that in the last ten years, despite the cash from the sale of broadcasting rights, there had been 36 insolvencies among Football League clubs and:

The effects of the provisions enabling priority to be given to football creditors in these insolvencies have been striking. Two examples illustrate this. Crystal Palace FC went into administration on 26 January 2010, [...]. Total unsecured liabilities were approximately £27 million of which debts to football creditors amounted to about £1,925,000. A total of £2,415,552 was paid to unsecured creditors. The football creditors were paid in full and the other creditors received a dividend of less than 2p in the pound. Plymouth Argyle FC went into administration in March 2011. The football creditors were paid in full while the other unsecured creditors received a dividend of 0.77p in the pound.[110]

87. Supporters' groups as well as our witnesses from the leagues and the FA all stated that there was "no moral defence" for the FCR. The Premier League defended the rule on the basis that it was difficult to abandon unilaterally and it represented the "least of a bad set of alternatives" for dealing with insolvency. Mr Scudamore argued that the FCR stopped a "cascade effect on other clubs", and that the alternative would be further clubs going into liquidation. He said that—because of the central funding it possessed—the Premier League could redirect funds from clubs to pay off football creditors. This had happened when Portsmouth became insolvent and the Premier League had been able to pay debts owed to Watford to prevent it from suffering financial hardship.[111] Mr Scudamore acknowledged that both leagues were able to withhold central funding from clubs that went into administration in order to pay off their debts to other clubs, but noted that when the Football League withheld funds to Port Vale, this in itself was controversial. [112]

88. Mr Scudamore argued that—instead of changing the football insolvency rule—the Government should change the current "very liberal" insolvency laws in the UK. He said that people should pay their debts, but noted that in any administration process there was a hierarchy of creditors.[113]

89. The supporters' groups called for the development of constructive alternative ways of dealing with insolvency on the ground that the FCR propped up an "irrational" business environment. The first step in replacing the FCR, they argued, would be a proper licensing system so that clubs could have confidence in each others' financial health. David Lampitt of Supporters Direct suggested that relegation clauses could play a role in a more immediate possible solution.[114] Greg Clarke of the Football League told us that he had a "moral quandary" with the FCR, explaining that, in his view, the interests of clubs—which were a community asset—had to be balanced with those of very small creditors. He acknowledged, however, that the football authorities needed to find something better.[115]

90. The FA did not comment on the FCR in its response to our recommendation because of the court case involving HMRC. However, at our evidence session in July, Alex Horne, General Secretary to the Football Association, acknowledged:

it is a moral quandary for all of us, but balancing the protection of the other members in that competition, protecting them arguably from themselves in terms of debts they have exposed themselves to and a club that finds itself in difficulty, is a fundamental rule that they all signed up to when they joined the league.[116]

He argued that there was no obvious alternative to the FCR and there needed to be consensus on any change: "the Regulatory Policy Group, the Professional Game Board and the leagues can consider this and come to a view. If they do not come to a view, status quo prevails".[117]

91. The insolvency trading body R3, which represents insolvency practitioners with experience of football insolvencies as well as those in other industries, argued strongly for the abolition of the FCR. It commented that the joint response of the football authorities failed to deal adequately with the problems surrounding the treatment of 'football creditors' who are paid in full at the expense of all other unsecured creditors.[118]

92. The FCR is of limited effectiveness when it comes to protecting clubs from each others' insolvencies—the only argument brought forward by the football authorities for its retention. R3 pointed to the fact that the FCR only protects clubs when they are owed money by other clubs based in the United Kingdom as there is no reciprocal agreement with those based overseas.[119] It arguably also has the potential to delay a club's financial recovery after an insolvency has taken place because it causes cashflow such as that from the sale of broadcasting rights to go to football creditors through the Football League rather than towards stabilising the club's finances. The FCR also reduces the value of the club under administration because of the significant financial obligations it places on any potential buyer before they would be able to obtain the club's share of league membership funding.[120]

93. A significant source of debt for football clubs is the money paid to other clubs in player transfer fees. Teams are currently able to spend huge amounts on buying players because other clubs are willing to allow them to enter into long-term payment agreements. Clubs are arguably willing to do this because they do not see it as a financial risk because the Football Creditors Rule (FCR) gives them preferred creditor status. The short-term effect of removing the FCR may well be to cause some clubs to suffer financially from the insolvencies of clubs which owe them money. However, in the longer term, clubs would be encouraged to require each other to demonstrate that they could afford the full cost of player transfers, which in turn has the potential to lead to more modest transfer fees being demanded.

94. The Football Creditors Rule protects the interests of often highly-paid footballers and other clubs at the expense of HMRC and the many small local businesses which supply clubs with services and equipment and which make up the majority of unsecured creditors. Despite the admission by the football authorities that there is no moral defence for the rule, they have failed to develop an alternative. The football authorities must explore other ways of reducing the chances of insolvency such as the greater use of clauses in players' contracts allowing clubs to pay them reduced salaries in the event of the team being relegated. We recommend that the Government legislate to ban the use of the Football Creditors Rule at the earliest opportunity.

Parachute payments

95. So called parachute payments were introduced to compensate Premier League teams following relegation to the Football League to allow them to adjust to the reduced revenue available. Our previous Report addressed concerns that these payments—which were significantly increased from 2010-11—could destabilise clubs in the Champions League: in other words, that existing Champions League Clubs might feel compelled to overstretch themselves financially to compete with their newly relegated rivals. In 2011 we urged the Football Association to broker discussions between the leagues to achieve an appropriate balance between the general 'solidarity' payments made from the Premier League to support Champions League clubs and the specific parachute payments made to relegated clubs.[121]

96. In July 2012, Mr Scudamore denied that parachute payments caused clubs to overstretch themselves, adding that they were prevented from doing so by the regulations currently in place. He also pointed to the fact that parachute payments were now made—on a reduced basis—over four years, thus spreading their impact. He argued that the payments were needed to encourage improvement and investment in infrastructure.[122]

97. A concern about parachute payments was that they would lead to teams being relegated and then almost immediately promoted because of the financial advantage they had been given over the other teams in the lower league. Mr Scudamore said that very few teams "bob back up" having gone down into the Football League. This year, he said, he was encouraged by the fact that the three clubs which had come back up into the Premier League had, thus far, remained there. He also argued that the Championship was in itself a very competitive league in which twelve teams at any one time were in receipt of parachute payments.[123]

98. Parachute payments play a part in the financial organisation of the leagues. However, their impact on—especially lower league—clubs needs to be examined by the FA Board in order to determine the appropriate level at which payments should be made to ensure that they cause the least disruption possible and do not incentivise financial risk-taking.

The grass roots

99. The development of a strong national team as well as the promotion of football as a national sport relies ultimately on the health of the grassroots game. We recommended in 2011 that the FA review spending at grassroots level. We also noted that the separation of the professional and national game throughout football's governance structures breaks the virtuous circle which should exist linking a thriving professional game feeding back resources to the grassroots players who, in turn, expand the talent pool available to the country's top clubs.[124]

DIVISION OF REVENUES

100. In our 2011 Report we recommended that the surplus revenue generated by the Football Association should be distributed at the discretion of the FA with the expectation that a minimum of 50% would go towards funding the national game.[125] Currently there is a fixed 50:50 division of surplus revenue between the National Game Board and the Professional Game Board. The rationale behind our recommendation was two-fold: that the professional game had significant alternative sources of funding and that giving the FA the flexibility to channel funding where it was needed would allow it to part-fund organisations such as Supporters Direct.

101. The joint response of the football authorities to our report praised the approximately 400,000 volunteers who work at the grass roots of football, but failed to address the issue of funding or the way governance of the professional and national game has been separated.[126] Supporters' groups regretted the separation of the development of the professional and the grassroots game in the joint response, arguing in particular that this would have a negative impact on youth development.[127]

102. Mr Scudamore told us that the leagues had developed a new elite player performance plan representing a "monumental" investment on the part of clubs and a "complete step change in process and funding".[128] He said that it would improve the youth game by focusing on the quality of coaching and education, linked to the development at St George's Park designed to create a university of coaching. The programme would be used to encourage grassroots football and would be—in the first instance—operated at the base of the football pyramid, focusing later on elite player development.[129]

103. The joint response does not address the Committee's recommendation to abolish the 50:50 divide of FA surplus revenues between the National Game Board and Professional Game Board. We remain of the view that the FA should be allowed to give a larger share of the surplus revenue to the national game if it wishes, as this has fewer sources of revenue.

96 http://www.bbc.co.uk/sport/0/football/18076714 Back

97 Appendix 1 Back

98 Q 28 Back

99 Ibid. Back

100 Ev w13 Back

101 Ev w20,para 4.3 Back

102 Appendix 1 Back

103 Qq 89-90 Back

104 Q 32 Back

105 Ibid. Back

106 'Spending curbs on agenda', Daily Telegraph ,September 6 2012, p6 Back

107 'United to argue case for tighter controls on spending', The Independent, September 6 2012, p64 Back