A Premier League Salary Cap: Questions and Consequences
Published 22 November 2012 By: Daniel Geey
It has recently been reported that the Premier League (PL) is considering implementing certain cost control measures. In line with the UEFA Financial Fair Play (FFP) rules and the Football League (FL) FFP rules, the PL is continuing the growing trend of leagues and associations looking to reign in club spending to ensure long term club sustainability.
The aim of this blog is to set out what the PL proposals may look like, the practical and political ramifications of whether such proposals are likely to be implemented and the consequences of such a change to the PL rules. Such consequences include comment on the potential legal challenges, the sanctions that may be imposed for breaches of the rules and who the rules may benefit.
PL and foreign clubs alike (bar a few jurisdictions) have historically been able to spend beyond their means in their search for success. Such astronomical spending usually occurs through the injection of funds from benefactors willing to subsidise a club's cost base. The PL, just like other leagues, has welcomed external investment into its football clubs. The one regulatory jigsaw piece missing from the PL handbook is something which has formed the basis of the updated UEFA Club Licensing Regulations as well as the recent Football League FFP rules. It is the break-even aspect that is absent in the current PL regulatory framework. Whether a break-even regulatory model is adopted by the PL rather than a type of salary is discussed below.
The reasons why the PL are now contemplating further cost controls may include the following:
PL club owners are keen to ensure the new likely £5bn+ television deal stays (to a degree) out of player's pockets. The rationale is that a salary cap will collectively dampen the wage market because the twenty PL clubs will only have finite wage resources to allocate to their players.Around half of the clubs competing in the PL may already be planning to compete in UEFA competition and therefore will have to adhere to types of cost control mechanisms like the UEFA FFP rules in any event.In an age of 'fiscal prudence', there may also be a heightened appreciation of the public mood of austerity and belt-tightening.
Regardless of the underlying reasons, it appears that the PL may well implement a version of UEFA FFP or alternatively push through a type of salary cap. For explanation on the UEFAand FL FFP rules click on the highlighted links. The aim of the rest of this blog is to examine the consequences for a salary cap in the PL and what form it could take.
A PL Salary Cap: The Options
The reported options that the PL are likely to consider during their November meeting include:
prohibiting clubs from increasing their wage bill by more than five per cent annually (the 5% increase rule);only allowing a club's wage bill to be a certain percentage of its overall revenue (the wage to turnover rule); oradopting a version of the UEFA 'break-even' FFP rules.
If the PL considers implementing the 5% increase rule, then that will disproportionately advantage those clubs with higher wage bills. The simple arithmetic being that 5% of a £70m wage bill (£3.5m) is £6.5m less than 5% of £200m (£10m). It has the impact of potentially protecting those clubs that have spent large sums on wages and disadvantages those who have been more prudent with their spending. Similarly, it could perversely encourage wage spending in the short term before sanctions kick in to provide clubs with bigger wage bills to increase season on season.
The second proposal links wage costs to revenue. Manchester City's recent wage to revenue figure of over 110% demonstrates that some clubs were spending more on wages than they received in revenues. This figure for Manchester City is now not as eye watering with the increased PL, Champions League and sponsorship monies in the last year.
An example of this rule in practice may see regulations that prohibit clubs from spending more than, for example, 70% of its income on player wages. As you can see from the below table (based on the 10-11 figures), over half of the clubs had wage/turnover ration of 70% and above. Whilst this benefits the bigger clubs with higher revenues, this at least incentivises revenue growth for all clubs. A similar system is in force in the FL divisions one and two. They are part of the Salary Cost Management Protocol (SCMP). For the 12-13 season, clubs in League 2 have to adhere to 55% wage to income ratio. Clubs in League 1 have to adhere to a 65% ratio. Swindon were recently were hit with a transfer embargo because they breached the SCMP regulations. As a result, the precise definitions of revenues and wages become extremely important for compliance purposes.
2010/11 Football Finance Figures
|Team||Turnover (£m)||Wages as percentage of turnover (%)||Wage bill (£m)|
|West Bromwich Albion|
|West Ham United|
source: Deloitte Football Finance Report and Guardian website
Below are a series of questions that the PL will no doubt be considering if and when some form of cost reduction mechanism is agreed to.
1. How will transitional seasons work? If the rule comes into force next season, it is highly unlikely sanctions will apply immediately. The FL FFP regulations state that there are no sanctions for breaching the regulations in the first two seasons. It would be expected that similar provisions could be drafted to provide time for clubs to comply.
2. How will any system work for promoted clubs? It would be extremely tricky and potentially unfair for promoted clubs to adhere to the PL rules in their first season in the top flight. The FL FFP rules allow for clubs relegated to the Championship to be exempt from sanctions in their first season. The club would however be sanctioned if they remained in the relevant league for a second season. The question for the PL is whether they would allow a one year exemption. It would otherwise be extremely difficult for championship clubs to plan accordingly for PL or FL competition.
3. Would the regulations be legal? The PL will no doubt take robust legal advice as to whether the agreed proposals would stand up to a legal challenge. It was well publicised that UEFA sought guidance from the European Commission regarding FFP for compliance with competition law and European free movement principles. It should also be pointed out that rugby leagues (the RFL and Premiership Rugby) have types of salary cap in operation. The Premiership Rugby cap is interesting for a number of reasons. Primarily because their regulations are modelled around a fixed figure (a maximum of £4.5m) for all clubs regardless of revenue or cost base. Clubs are also incentivised with 'cap credits' should they retain a certain amount of youth team players in a match day squad. Controversially, there is also a 'star player exemption' which allows each club to nominate one player whose wages are not included within the cap. Interestingly, the nominated player's identity is kept secret.
It should be stressed that just because a salary cap is in place in the UK does not make it legal. However to date, and since 1999 when the Premiership Rugby cap was introduced, legal challenges to the salary cap have been thin on the ground though recent reports suggest a challenge may occur shortly. There are always potential grounds to challenge such a restriction. It may take the form of a competition law challenge to the Office of Fair Trading (OFT) or a complaint to the European Commission though proving an EU dimension for a domestic PL rule may prove challenging. The ultimate question is who would bring such a challenge. The clubs, the PFA, FIFPro or a football agency on behalf of its players? There is then the question of the appropriate forum for the challenge (presumably the High Court) which would be less likely to lead to a speedy resolution. Even a valid complaint to the European Commission it not a quick process.
The RFU set out on their website that they believe the salary cap ensures competitive balance in the league and promotes club sustainability. Such arguments would be used to justify why, among other things, such rules are appropriate, reasonable and proportionate. The recent RFU London Welsh case demonstrates however that regulations which go beyond what is necessary can be deemed contrary to competition law.
4. What sanctions could be imposed? In theory, anything is a possibility but in practice, just as the FL have done when implementing their FFP rules, is that the harshest sanctions (e.g. expulsion/relegation) were not not considered appropriate. FL FFP sanctions involve either a registration embargo or a fine. The UEFA Club Financial Control Body have been given express powers set out here which include at Article 21 the possibility of a points deduction, disqualification and/or removal of title. Until the UEFA FFP regulations are tested with relevant cases, it is difficult to assess which sanction will be afforded to which circumstance. Undoubtedly, the harsher the infringement, the more severe the penalty. It therefore remains likely that the PL clubs who will be voting for their favoured regulation will decide that registration embargo's or fines will be preferred to expulsion, relegation or points deductions.
5. Would FFP be easier to adopt? One point for the PL to debate is whether it may actually be easier to adopt a version of the UEFA FFP rules. This would possibly be the smoothest transition for many of the PL clubs to make as they will have to adhere to the regulations in any event to participate in Champions League or Europa League competition.
Such a proposal also has the benefit of reducing the number of regulatory systems in place. The danger of multi-league/association regulation becomes apparent when there are a whole raft of regulations for different leagues and competitions. Many believed the Select Committee Report into Football Governance would provide a joined-up domestic licensing system which would encompass all PL and FL clubs and ensure adherence to the same set of uniform financial licensing requirements. It remains to be seen whether the Government adopt such uniform licensing system proposals. In the meantime, the FL and PL are pushing ahead with their own forms of regulatory change.
6. How will the new cost control measures be adopted? The final agreed proposals will require agreement of 14 from the 20 PL member clubs. Whilst it has been reported that a
salary cap of some description has support from both Manchester clubs, Liverpool, Chelsea, Sunderland, Arsenal and Aston Villa, many more clubs will need to be persuaded of the benefits of such a system to make the proposals reality.
We await any announcement by the PL with interest. Any cost control measures have the potential to significantly affect the sporting and financial performance of top flight clubs. However, until the proposals are more concrete and ultimately the rules are published, the guessing game continues.
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Daniel is a Partner in the Sport Group.
Daniel’s practice focuses on helping clients in the sports sector, including rights holders, leagues, governing bodies, clubs, agencies, athletes, sports technology companies, broadcasters and financial institutions.