English Clubs are CRUMBLING Under FFP
This winter transfer window was unusually quiet. Chelsea, for example, despite sitting in 11th and obviously being willing to spend big, haven’t made a single incoming transfer. The same goes for Manchester United, Liverpool and Arsenal. What’s going on?
They’re all affected by the Financial Fair Play (or FFP) rules. FFP have been around for a while, so has their English companion rules – the sustainability and profitability rules. This season we’ve seen more teams affected by the rules than before.
I looked but there is no space. No space on FFP to do something about this lack of quantity in the striker position. It's a gap in our squad. Clear.
Erik Ten Hag
What are the financial rules the clubs have to follow?
Rules for English clubs
For English Premier League clubs there’s another couple of rules to follow, in addition to the UEFA rules. In the EFL there are further financial restrictions. The two rules are the “Profitability and Sustainability Rules” and the “Short-Term Cost Control” (also known as the STCC).
The Profitability and Sustainability rules say that no club can have a loss of more than £105 million over a period of three years. At lower levels, this figure is lower. This allows the club to lose more money in individual years but they’ll have to make up for it in the future. The rules apply throughout the English football pyramid but the allowed losses get smaller the further down the league system you get.
The STCC says clubs can’t increase their wage bill by more than seven percent without offsetting it by more commercial revenue. These rules are enforced by the Premier League. Only a few teams in the lower leagues have been punished for being in breach of these rules. That is until this fall, when Everton got a 10 point deduction.
UEFA Rules
The UEFA FFP rules are stricter than the Premier Leagues. For a team competing in the European competitions, the financial rule is that the club must break even in rolling three year periods. They have also more successfully enforced their rules as, for example, AC Milan were banned from competing in UEFA competitions for a season.
In England, the teams competing in or aim to compete in Europe are the ones affected by these rules. These rules are enforced by UEFA.
Why is this happening now?
It becomes more and more expensive to get to and stay at the top. With state backed clubs like Newcastle and Manchester City inflating their revenues with, allegedly, phoney sponsor revenue to be able to keep spending, clubs without such sponsors have a hard time keeping up.
We’re now three seasons after the COVID-19 season, during which the financial rules were eased up significantly. Clubs now have to function completely within the rules for the first time in over five years.
The risk appetite has also increased. The financial benefit from staying in the Premier League drives clubs like Nottingham Forest to spend money they don’t yet have in order to stay up. Meanwhile, as interest rates have increased, clubs' costs for servicing debts have increased.
All these factors increase player salaries and transfer fees but don’t contribute to growing revenues or profits.
Examples: Everton and Nottingham Forest
Everton were found to be in breach of the Profitability and Sustainability rules last year. They were handed a 10 point deduction. Their problem is that while football seasons are played September to June, the financial year is January to December, so a new financial year started just a month ago.
A new financial year means a new three year period where the club cannot make losses of more that 105 million, which Everton has once again breached. They could be deducted another 10 points in the same season.
The Liverpool club also argues that the way their losses have been calculated by the Premier League is wrong. By their calculations, they’re £9.7 million in the red, the Premier league claims it’s £19.5 million.
Nottingham Forest have also been found to be in breach of these rules by spending more than the allowed amount and are expected to be given some punishment in the coming month. In the case of Nottingham Forest, the allowed loss over three years is lower, since they played in the Championship for two of the three affected accounting years.
Both clubs have admitted to being in breach of the rules and are now negotiating with the Premier League about how severe the punishment should be.
What’s the difference with Manchester City?
Manchester City are also in trouble with regards to FFP but their situation is very different. The difference is that Everton and Nottingham Forest have already admitted to being in breach of the sustainability and profitability rules. The 115 charges against Manchester City, however, have yet to be proven.
Additionally, they’re accused of failing to provide accurate financial information, of trying to deceive the Premier League. This information includes fake sponsorships and secret manager contracts rules over a period of nine years. With accurate information, they might very well be in breach of the FFP too.
The charges are similar to the ones brought against City by UEFA in 2019. At that time though, too much time had passed since the alleged misconduct and the case was dismissed. According to Premier Leagues rules, there is no statute of limitations for this, which is why they can still pursue it.
Why are Tottenham not affected in the same way?
Two words: David Levy. Often criticised for being cheap and hard to deal with, the Tottenham chairman is a very shrewd businessman. Tottenham, much like the other Premier League teams, are operating on a negative transfer net.
However, when the club decided to build a new stadium, they went with a multi purpose arena. In addition to football, the stadium can also be used for concerts and other sporting events such as NFL games and rugby. The profit from other events gives the club more room to operate within FFP.
Since it opened in 2019, the London club makes money off their stadium even when the lily whites aren’t on the field. Last summer, Beyonce performed at the stadium for three nights and this summer, Pink will be performing for two nights.
They were very smart in financing the stadium too. Rather than taking out traditional bank loans, they were able to use corporate bonds to lower their interest rates. Today, the interest rates are higher but since their bonds are fixed rate Tottenham are still paying a lower rate.
Criticisms of the financial rules
Incentivising Selling Academy Products
One of the major problems with these financial rules is that it makes selling academy players very beneficial to the club. We all love it when a player gets to debut for their boyhood club. When someone makes it all the way through the academy teams to the Premier League. These stories could become fewer as a result of the rules.
When a player is bought the value of the transfer is amortised over the length of the player's contract. This is purely an accounting exercise and happens regardless of whether the payments are made all at once or over a period.
So if a player cost €50 million and writes a five year contract, that transfer will negatively affect the club's books by €10 million per year. If the player is sold before the contract is up, the club's profit is the transfer fee they collect minus the amount not yet amortised. So if the €50 million player is sold for €60 million after two years, €10 million has been amortised the first year, and €10 million the second year, leaving €30 million. The club’s profit will be €30 million.
If the club sells an academy player there, there’s no amortisation on the books for the player. So if he is sold for €60 million the club's accounting profit will be €60 million Under these rules, it’s more beneficial to sell the academy player as he affects the clubs adherence to the Profitability and Sustainability rules.
This is why Chelsea have been giving players seven year contracts, it allows them to spread the cost of the transfer over more years. The effect on their accounting profit becomes lower. The rules now restrict the length of contracts to five years, so that “loophole” no longer exists.
No Clarity Regarding Sanctions
The Premier League has a few different ways of sanctioning the clubs, including fines, points deductions and suspensions. However, there’s no set scale for the sanctions. There’s no way of knowing what you’re facing if you’re about to break the rules.
Absolute Sums for Losses
Another criticism is the fact that all clubs have the same absolute sum as a maximum loss over three years.
The latest figures we have for club revenue is 2022 (2023 hasn’t been filed yet). That year, Manchester City at £619 million had the highest revenue while Burnley £124 million had the lowest revenue in the league. At a three year loss of £105 million, Burnleys margin would be -28% – a huge loss. Meanwhile, for Manchester City, that would be -5% – yes, it’s a loss but, in relative terms, it’s very small.
And keep in mind that in 2023, Luton’s revenues will come in even lower than Burnley’s. The smaller clubs, then, can take way bigger risks with their finances. They’re also, often, the ones that are the more unstable financially.
Looking Forward
Having financial rules is a good thing. Before, the clubs could run without regard to finances and clubs with external investors were in a huge advantage that had nothing to do with football. Clubs like Chelsea and Manchester City were able to build their teams up with financial doping for years.
The way the rules are applied has not been good. There’s uncertainty in the sanctions and there are adverse effects like incentivising selling academy products. Lately, there has been talk of changing the rules to a cost cap of revenue instead. UEFA currently has a cost cap at 70%, which can be spent on the squad, including wages, transfer fees and agent’s fees.
Going forward, many clubs will be looking to Tottenham's success. Building a multipurpose arena has proven very successful. Outside of England we’ve seen Real Madrid completely rebuild the Santiago Bernabeu to be multi-purpose.
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