Gambling with FFP – Column
Wednesday, 19th Feb 2020 19:13 by Simon Dorset
With a dispiriting January transfer window behind us, and the next set of QPR accounts due any day, our resident grown up Simon Dorset gave LFW his latest assessment of FFP’s domineering effect on the Championship.
Financial Fair Play is never far from the headlines. There seems to be a continual stream of reports regarding loopholes being exploited, spending limits being breached, parole conditions not being met or complaints about non-compliance being made; now more than ever, FFP is at the heart of all the major Championship news stories. With these stories likely to proliferate in the coming weeks, and with due apologies to those of you who read my column in AKUTR’s to whom some of his may be all too familiar, it seems a good time to subject you to some of my views on a number of the ongoing issues.
According to the UEFA website, “financial fair play is about improving the overall financial health of European club football” and that the regulations are designed “to prevent professional football clubs spending more than they earn in the pursuit of success and in doing so getting into financial problems which might threaten their long-term survival”. I’m in no position to comment on the success, or otherwise, of these objectives across the European mainland, but in England, and particularly with the English Football League’s adaptation of these regulations, they have had, in too many cases, completely the opposite effect. More so than in any other division in the world, the promise of the riches shimmering in the distance lure some Championship clubs to gamble with their very existence. To make matters worse, the deck is well and truly stacked.
Stacking the deck
I think that we are all very familiar with the fact that any Championship club can lose up to £39m over a three-year rolling period with various disallowable costs, such as infrastructure projects, investment in academy and youth development and donations to the club’s community trust, among the things excluded from the club’s FFP submission. The effect of spending one or two of those seasons in the Premier League is less frequently discussed.
The £39m is based on a permitted loss of, on average, £13m per season after disallowable costs. For clubs relegated from the Premier League, this is increased to £35 million for each season spent in the top flight. Therefore, if a club spends one season in the top flight, its permitted rolling three-year loss is increases to £61 million (35+13+13) while its season in the Premier League remains within its reporting period.
Clubs relegated from the Premier League also benefit from parachute payments which are based on the amount of money that every Premier League club receives as its part of the broadcasting rights which are shared equally between them. This figure is currently approximately £77.5m. The first years parachute payment is calculated as 55% of that figure (approx. £42.6m), the second year’s payment is 45% (approx. £35.5m) and the third year, which is only paid if the club was in the Premier League for more than one season, is 20% (approx. £15.5m).
This combination of greater permitted losses and generous parachutes payments should give the relegated clubs a significant advantage over established Championship clubs, although many have failed to take advantage of it. Stoke City being a case in point, they are clearly failing to get anything like good value out of their reported £40m annual wage bill and face major surgery this summer when their parachute payment will drop by £20m.
While I agree with parachute payments, does it really make sense to allow clubs to lose more money in the seasons they spend in the Premier League? Surely this sends out the wrong signals? I appreciate that I’m being a little hypocritical here as this allowance enabled us to adhere to our first assessment in 2017, but considering the fantastic broadcasting rights the Premier League clubs enjoy and the enormous commercial opportunities their status allows them, why do they need to make a loss at all? This, of course, won’t change as it dovetails with the Premier Leagues own regulations.
Going all in
To combat the advantage given to the relegated clubs, some established Championship clubs, such as Derby County and Sheffield Wednesday, have gone all in by taking the reckless step of selling their ground and leasing it back to keep funding their promotion attempts. Bizarrely, this is not only permitted within EFL’s FFP regulations, it seems to almost be encouraged by them as they state that they must include any profit or loss on the disposal of tangible fixed assets without any clauses or sub-provisions to ring fence the club’s home.
It would be inherently wrong for any football authority to dictate to clubs that they cannot sell any of their assets, including their ground, and, of course, these sales have to be recognised correctly in their published accounts. However, the authorities do have plenty of leeway when it comes to the FFP submissions and the solution to this ridiculously short-sighted thinking is quite simple. Rather than recognise the whole of the profit gained by selling their main asset, clubs should have to deduct the cost of 50 years leasing back the stadium. By simply adding that clause to their FFP regulations the EFL would stop this ill-conceived practice overnight.
As much as I’d like to take the credit for this idea, it is already in place in UEFA’s FFP regulations which state that “If a club demonstrates that it is replacing a sold fixed asset, then the profit on disposal recognised in the income statement can be taken into account as a relevant income up to: ……….. the difference between the proceeds on disposal and the present value of 50 years’ minimum lease payments in respect of the replacement asset to be used by the club under a lease/rental arrangement.”
If this criteria was applied to Derby, who I understand are leasing Pride Park back at £1.1 million per season, their £39m profit from selling Pride Park (it was sold for £80m less its value in their books of £41m) would actually show a loss of £16m for FFP purposes. I can’t begin to envisage what possessed the EFL decided to leave this very sensible safeguard out of their FFP regulations.
The punishment for losing the gamble is the area which results in the most frustration among QPR supporters who feel that Rangers were dealt with far more harshly than Birmingham were and any other transgressor will be. I disagree, but before explaining why let’s understand Birmingham’s punishment. The report released by the disciplinary commission regarding their verdict on the EFL’s case against Birmingham City for their breach of the FFP regulations contained a detailed explanation of why Birmingham were only deducted nine points.
In the weeks and month leading up to the decision, all the talk had been of a 12-point penalty, but the report revealed that this only applied for breaches of over £15m. For breaches under this amount, this notional figure is reduced according to a sliding scale. As an example, if a club is only up to £2m over their FFP limit, the 12-point deduction is reduced by nine points. Birmingham, who fell into the £8m to £10m bracket qualified for a reduction of five points and so their sanction was seven points.
This points deduction is then subject to be increased depending on “aggravating factors”. On the face of it, Birmingham signing Kristian Pedersen last summer while under a transfer embargo would appear to fall into this category, but this was not regarded as such by the tribunal. Transfer embargo is a very misleading term, registration embargo is far more accurate. Clubs are entitled to sign whichever players they like, but their ruling authority, in this case the EFL, can refuse to register them. Back in 2015, Barcelona signed Arda Turan and Aleix Vidal while under a transfer embargo, neither player was registered until the following January. As the EFL did eventually ratify Pedersen’s registration before the season started, any argument the EFL had would have been with themselves.
That is not to say that there weren’t any aggravating factors. Birmingham’s own forecast in June 2017 predicted that while they would just manage to satisfy the FFP requirements in the 2017/18 season, they would fail to do so for the following two seasons. Their response to this was to allow Harry Redknapp to sign nine new permanent players and another five on loan at a cost of £23.75m, nearly doubling the cost of the players’ wages in the process. The tribunal regarded this as an intentional breach of the rules and, as such, warranted the deduction of a further three points increasing Birmingham’s sanction to ten points.
However, as Birmingham admitted that they’d breeched FFP, albeit at a point at which they could hardly deny it, was rewarded with a further point being deducted from their sanction, reducing it to a final total of nine points. Birmingham were also required to pay the costs of the tribunal and the legal cost of the EFL.
While I regard it as futile to try to draw comparisons between Birmingham’s punishment and QPR’s as both the rules and sanctions had been totally revised between the two offenses, I would like to explain why I cannot agree that QPR were more harshly treated. As a reminder, QPR’s had to pay a fine of £17m (spread interest free over ten seasons) plus the EFL’s legal costs of £3m, suffered a registration embargo for the duration of the January 2019 transfer window and the club’s shareholders had to capitalise £22m of outstanding debt.
It was the last of these terms which allowed both parties to walk away from the negotiations satisfied. The EFL could claim that they got their £42 million worth of flesh as stipulated in the regulations for our level of breach, whereas as QPR’s owners already had an established record of converting loans into equity; this was no punishment. Similarly, due to QPR’s ongoing battle to remain within FFP’s limits, I wouldn’t have expected them to have been active in the January transfer window; this was no punishment either.
That just leaves the £17m fine and costs. As these are outside of the scope of FFP submissions, and the owners have repeatedly stated that they will pay the fine themselves, this has no bearing on the club’s operational or transfer budgets; this was no punishment to the club either. Had we been subjected to the appropriate points deduction that is often referred to as meaningless, and had there been any suggestion that our offence qualified as aggravated, such as signing Kevin Doyle, Mobido Maiga, Yossi Benayoun and Will Keane in the January transfer window knowing that we were already going to fail to adhere to the FFP regulations, we’d have been relegated.
The other point which is generally overlooked is just how flagrantly we broke the rules. We lost £65.2m in a season, before disallowable costs, when we were allowed to lose £3m, Birmingham, by comparison, lost £48m over three seasons when they were allowed to lose £39m. In my opinion, the EFL realised the punishment as laid out by the regulations at the time was out of proportion and bent over backwards to accommodate us. While I don’t expect my opinion to strike a chord with those with an entrenched view that we were harshly treated, it is worth noting that Nick De Marco, who led our legal team in our defence against the EFL has recently been appointed to represent Derby County in theirs. That suggests to me that they think he did a good job for us.
The doyens of the English Football League are meeting later this month to discuss Financial Fair Play with a view to updating the regulations before the start of next season. While it is important that they attempt to close down the loopholes, it is equally important that they understand that any regulations that stifle ambition are just as detrimental to the game as the overspending they are trying to prevent. If, at this meeting, the clubs agree a measure, such as the one in the UEFA regulations, to make selling their ground far less attractive and another to allow owners to inject capital into their club, the temptation for them to take ridiculous gambles would be alleviated. And they have it in their power to make these changes, it only takes 75% of them to vote for it.
That, of course, won’t happen.
Simon’s previous >>> Tough battle in ongoing FFP war >>> EPPP, the greater evil >>> Terry Venables, my first hero >>> Farewell to the King >>> Gordon Jago: A soccer pioneer >>> QPR’s fairytale of New York
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