A Brief Analysis of the Premier League's New Financial Fair Play Regulations

For many years, financial regulations were basically non-existent in European football. Thus, the sport became a sort of utopia for any ambitious owner to attempt to lead their chosen club to the top of European football, the UEFA Champions League. Many clubs have attempted to attain this goal by buying a team full of talent. Others sought to capitalize on already successful teams by building huge and luxurious stadiums. By 2009, according to a study done by the Union of European Football Associations (UEFA), half of Europe's 655 football clubs ran at a deficit the previous year and the combined debt of these clubs was £1 billion. Today, that figure is over €8 billion.

As a result UEFA, led by Preside Michel Platini, created the Financial Fair Play Rules (FFP). The problem with these rules is that they would only apply to football clubs participating in UEFA sponsored competitions (the Champions League and Europa League). Meaning that in most countries the rules would apply to somewhere between 6 and 4 teams. Thus, for financial reform to take root in football, UEFA needed the domestic leagues to buy into their rules.

In ealy 2012, the Football League, which comprises the second through fourth divisions of English football, announced its own set of Financial Fair Play rules aimed to reduce the levels of losses being incurred and establish a league of financially self-sustaining professional football clubs. The rules established by the Football League include a break-even approach (similar to that in the UEFA rules) for the Championship and a salary cost management protocol for the lower divisions. The latter method limits spending on wages to a portion of each club's turnover. The Football League cannot, however, just ban clubs from league play. So, instead of the ban on participation that UEFA uses as a sanction, the Football League will impose transfer embargos, preventing clubs from signing new players, until they are in compliance with Financial Fair Play.

Today, the big blow arrived. The Premier League shareholders passed a set of financial regulations for its clubs.These rules, like those set forth by UEFA, also encourage teams to work towards break-even. Beginning with the 2013/14 season, Premier League clubs cannot make a loss in excess of £105 million total across a three season period. Additionally, clubs will be restricted in terms of the amounts of Premier League Central Funds that can be used to increase player wages. This portion of the rules essentially amounts to a soft-salary cap. If the club exceeds the cap then additional wages cost will have to be funded by increased commercial revenues that the club itself made during the season.

That's the plan on the most basic level, but let's take a look at the specifics of each method of financial reform and then some of the challenges that the Premier League faces.

In relation to the break-even aspect of the rules, clubs can make a £15m loss over a three year rolling accounting period. This means that a £5m per season loss can be covered by owner loans. Clubs can make a cumulative £35m loss over a three year rolling accounting period (the first being 2013/14, 2014/15 and 2015/16) I.e. a total loss of £105m if:

• owners guarantee the funding;
• show financial forecasting projections to the PL (which is already required); and
• £90m of the loss is injected into the club by way of equity (shares).

Regarding the salary control restrictions, only a £4m increase in the wage bill for PL clubs will be allowed. If a PL club spends more than an additional £4m on wages from the previous season, the additional wage cost can only be funded by increased commercial revenues that the club has made during that season. The below table sets out the defined amounts:

For reference, in 2011-12 (the last season that wage data was available for) only seven Premier League clubs wage feel below £53 million, thereby making them exempt from the restrictions. This portion of the rule is, obviously, in place largely to benefit newly promoted clubs, who will have to expand their wage bill to compete in the Premier League.

There are a number of questions that still need to be answered. Chief among them are, how the rules will apply to the aforementioned newly promoted sides, what sanctions will be imposed upon clubs that don't comply with the rules (though PL chief executive Richard Scudamore has suggested points deductions will be the likely punishment), and how the PL will require a club to guarantee the losses that were made.

The obvious goal here is to check the ever expanding wage budgets of the Sky Six, though probably more precisely Chelsea and Manchester City. A £4 million increase basically amounts to 1 player on a £77,000 per week contract. Thus if City, Chelsea, or United plan on making big splashy signings like Falcao, they would have to offload other wages to avoid running afoul of these rules.

The problem, however, is that these rules are a soft cap and teams are allowed to compensate for wage increases with commercial revenue. The clubs with the biggest wage budgets already have the most commercial revenue. For reference, Tottenham Hotspur made £41 million in commercial revenue. While, that pales in comparison to Manchester United's commercial revenue, it's certainly enough to cover a few extra millions in wage costs.

While it will be easy for big clubs to get around wage restrictions, the break-even provisions may have considerably more bite. UEFA's FFP rules are fraught with loopholes that clubs like Chelsea and Manchester City can exploit. For example, UEFA will grant exceptions to clubs showing a positive trend toward compliance, exempting some contracts from being included, and adjusting some relevant incomes. For example, Manchester City lost £197 million in 2011, the following year, they lost only £97 million. That would probably qualify as a positive trend in the eyes of UEFA, despite the jarring amount of money being lost.

We wont't know what, if anything, the Premier League will be doing to ameliorate the problems with UEFA's rules until the regulations are published. However, people in favor of financial reform should take solace in the fact that Scudamore and heads of other English clubs have been some of the most outspoken critics of the laxity of UEFA's rules.

Author's Note: Portions of this article were excerpted from my working paper on the legality and anti-competitive nature of UEFA's Financial Fair Play Rules.