Sustainability, fairness and competitiveness: Leicester and financial regulations

Even in the adversarial world of football it is rare for an outcome to produce such diametrically opposed reactions. Some regard the decision - to charge Leicester, along with Nottingham Forest and Everton, for breaching the Premier League’s profit and sustainability rules - as an illustration of the misplaced – even corrupt – nature of the regulations themselves. Others put the blame firmly at the door of the clubs who, it is said, have brazenly overspent despite being well aware of the consequences. To get to the bottom of these apparently contradictory responses it is necessary to examine the purpose of the regulations. 

Sustainability

The initial rationale for trying to limit spending came from a recognition, by UEFA in the first instance, that, in the wake of the global financial crisis, too many (most in fact) clubs were making significant losses and a fear that some would financially collapse under the weight of their debts. It was inevitable that the introduction of financial restrictions by UEFA in the 2011-12 season would lead to national football authorities following suit. 

 In an era where Premier League clubs are, for the most part, owned by committed multi-billionaires, it seems odd to be worried about top-flights clubs becoming insolvent. The existence of the spending limits, however, prevents a financial free for all where it is likely that clubs would overspend recklessly in order to compete. The demise of Portsmouth - once one of the great names of English football, who became insolvent in 2010 when in the Premier League after years of financial mismanagement - was undoubtedly on the minds of the English football authorities at the time. There was also, of course, the experience of Leicester City who, a decade earlier, fell into administration after spending too much trying, unsuccessfully, to survive in the Premier League.

Fairness

Few, then – on sustainability grounds alone - would recommend a return to an era where there were no restrictions on what football clubs can spend. But what about fairness? Here, again, there is a justification for the kind of spending limits that exist. It is important to note that profit and sustainability rules don’t put absolute spending caps on clubs. Rather, they insist that they do not spend too much (a maximum of £105 million losses are permitted over a three-year cycle in the current rules) over the revenue that they raise from football activities – transfer fees, commercial undertakings, match-day and broadcast income. As a result, the higher a club’s football revenue, the more they can spend on buying players and paying wages. 

These rules seem fair enough in that the clubs with the biggest fan bases can spend more. What they prevent is a club’s performance on the pitch being entirely dependent upon the wealth of their owners. If that was the case, there would be nothing to stop those such as Manchester City and Newcastle United, with state backing, from simply spending unlimited amounts buying the best players and coaches and paying them the highest wages. Even the considerable wealth of the King Power Group - Leicester City’s owners – wouldn’t be enough to compete with the wealth possessed by these – and some other - club’s owners. It is the regulations, of course, that have prevented Newcastle from buying the Premier League title like Jack Taylor did at Blackburn in the 1990s. It is also fair that those relegated to the Championship should be subject to the more onerous financial regulations the EFL has put in place. Indeed, arguably, relegated clubs still have too many financial advantages. It is no accident that the Foxes, Leeds and Southampton occupy three of the top four slots in the Championship.

The Premier League’s charges against Manchester City accuse them, amongst other things, of trying to subvert the spending limits by fraudulently claiming that some of the owner’s wealth put into the club was commercial revenue. Football fans are right to be frustrated at the time it is taking to process these charges, but they are more complex, and difficult to prove, than the overspending admitted to by Everton, Forest and, presumably, Leicester. What is clear is that, if found guilty, the Premier League, having taken action against less prominent clubs, will be under enormous pressure to punish Manchester City with an even more draconian sanction.

 Competitiveness

Readers might by now assume that I have no problems with the regulations. That is not quite true. In a sense, I do think that the Foxes, along with Everton and Forest, have been guilty of financial mismanagement. They knew the rules, voted in by all Premier League clubs, and chose, for whatever reason, to flout them. I suspect that all three clubs never really thought the Premier League would start taking the breaches seriously. 

the key reason why the three clubs broke the rules was to enable them to compete successfully in the Premier League. For Forest, it was a matter – initially at least – of survival. For Everton and Leicester, it was the more aspirational goal of competing at the top end of the division. And this leads us to the major problem with the regulations as they stand. As I have written before, they have the effect - unintended or not - of inhibiting competition. By benefiting the clubs with the highest football revenue – the ‘big’ six – they reinforce the status quo. Despite what the Premier League and its supporters in the media say, it is not a particularly competitive product. It is very rare for any of the big six to lose to one of the other 14, the top positions in the league are almost always occupied by the big six and, more often than not, they win the cup competitions.

Leicester’s story is a striking illustration of the closed nature of the upper echelons of the Premier League. The club tried to break this trend. They won the competition in 2016 against all the odds and in subsequent years tried desperately to break into the top six permanently. In order to do so, they had to breach the financial regulations. In other words, they got too close to the sun and are now being burnt.

Many would argue that the lack of competition in the Premier League is morally wrong, that it is an unwarranted restriction on aspiration. Another objection is that the lack of competitive balance damages the product; that, ultimately, fans and TV viewers will walk away from a product where too many matches are one sided with easy to predict outcomes. This is why the lure of a European Super League is so powerful for the big six. They can see the huge potential earnings from a competition which pits evenly balanced big clubs against each other. 

Premier League clubs have seen that the present regulatory system is not working and have agreed to change the rules at the earliest possible opportunity. However, the proposed change to a squad cost ratio rule - whereby clubs are only permitted to spend a certain percentage of their revenue on transfers and wages – is unlikely to tackle the lack of competitive balance that currently exists.

There is, alternatively, a strong case for tweaking the regulations in order to put less weight on existing football revenues when calculating profit and loss thereby allowing rich owners to put more of their money into clubs without facing charges. In this way, the prospects of a repeat of the Leicester City ‘miracle’ become greater.