In my earlier essay on Financial Fair Play and the Profit and Sustainability Rules I concentrated on the financial consequence to owners if a Championship club has 3-year losses in excess of £15m; a so-called “soft failure of FFP”.
That essay is referenced at the end of this treatise.
This essay looks at the consequences to the club of a “soft failure of FFP”.
I also include a brief summary of why Birmingham City were subject to soft sanctions and why this led to them being deducted points.
Loss Thresholds
I covered this in detail in the earlier essay so I will not repeat here.
In essence, if the Adjusted Losses that a club incurs over a three year period total more than £15m then they have incurred a “Soft Failure of FFP”. Total adjusted losses over £39m is a so-called “Hard Failure of FFP”.
Consequences of Failure
A soft failure has a consequence for the club owners, as set out in my previous essay.
In addition to the owners getting punished the club also suffers, or at least the club COULD suffer – it depends upon a decision by the EFL.
A soft failure means the club is subject to “Soft Sanctions”.
Soft Sanctions do not necessarily mean that a punishment is imposed on the club, as shown below.
Club Consequences of Soft Sanctions
The rules say that if a club suffers a soft failure and then they must “provide future financial information” covering the next two seasons. Future Financial Information is a fancy way of saying “a budget for the next two seasons”.
Exactly what the club forecasts in its future budgets determines just what happens from then onwards.
First Step towards Punishment
There is no longer an automatic punishment associated with FFP, either for soft or hard sanctions.
A club entering soft sanctions, whether from being just over the £15m loss threshold or being close to the £39m loss threshold, is at the mercy of the EFL.
After clubs have supplied the forecast budgets for the next two seasons the EFL will analyse them and “Where the Executive determines, in its reasonable opinion and having considered any information provided to it by the Club, that the Club may not be able to fulfil its obligations…” the EFL can take further steps.
The Obligations
Before we look at the punishment, let’s look at what these “obligations” are that the EFL are talking about. They are listed below:
“(a) pay its liabilities to the creditors… and to any foreign Transferor Club and to its employees as they fall due
(b) fulfil its obligations to play fixtures under the jurisdiction of The League
(c) be able to provide such rights, facilities and services as are required to enable The League to fulfil its commercial and broadcasting contracts
– provide evidence of Secure Funding either from future trading or directly from owners”
In other words, if the EFL think that a club may not have the ready cash to remain solvent for the next two years they will take action, as detailed below.
Punishments
The consequences of entering soft sanctions range from no punishment to being referred to a tribunal where points can be deducted or worse.
If a club provides reasonable evidence that they can meet the obligations set out above then no further action is taken.
However, if a club cannot produce believable and satisfactory forecasts then the EFL can “require the Championship Club to submit, agree and adhere to a budget which shall include Transfer Fees, Compensation Fees, Loan Fees or subsequent payments due under the terms of any transfer, players’ remuneration and fees payable to any Intermediary” and “require the Championship Club to provide such further information as The League shall determine and for such period as it shall determine”.
In other words, the EFL can force a club to work to a budget that it feels will keep the club solvent and the club must continue to supply monthly accounting information to show that it is keeping to the budget.
As part of this budget the EFL can “refuse any application by that Championship Club to register any Player or any new contract of an existing Player of that Club”.
Failure to Comply
Again there is no fixed penalty for a club which doesn’t do as requested by the EFL.
However, a failure is taken as misconduct or a breech of P&S Rules, as described in Section 8 of the EFL regulations, and the club can be charged and prosecuted at a Disciplinary Commission.
Any club found guilty by a Disciplinary Commission can be punished by the Commission; possible punishments are:
“92.2 A decision may:
92.2.1 order a party to do or refrain from doing anything;
92.2.2 order a specific performance;
92.2.3 make a declaration on any matter to be determined;
92.2.4 issue a reprimand or warning as to the future conduct of a party;
92.2.5 order the payment of compensation to The League, any Club, any other club, Player or other person;
92.2.6 order a suspension of membership of The League;
92.2.7 order a deduction of points;
92.2.8 impose a financial penalty payable to The League;
92.2.9 recommend expulsion from membership of The League;
92.2.10 order a withdrawal or loss of benefit otherwise available to members of The League e.g. basic award or ladder payment;
92.2.11 impose an embargo on registration of Players;
92.2.12 order any other sanction as the Disciplinary Commission may think fit;”
Who has been served with Soft Sanctions?
Despite the EFL rules on FFP stating that an objective of FFP rules is to “increase the transparency and credibility of Clubs” the actual monitoring, analysis and implementation of FFP by the EFL is kept secret.
However, we do know that Birmingham City have been served with soft sanctions (which later turned into hard sanctions and a points deduction) as well as Sheffield Wednesday, who seem to have obeyed the EFL until they were able to sell their stadium (I understand Wednesday have just been released from soft sanctions completely as a result).
Birmingham’s Soft Sanctions
Birmingham City submitted their 3 year accounts to the EFL on 1st March 2018 as required – these consisted of two seasons actual accounts and a third estimated accounts for the season 2017/18 which was still underway.
The estimated accounts showed that they expected to sell players and by doing so the total losses for the 3-year period would be just lower than the £39m limit. They would however fall into the area of exceeding the lower £15m loss threshold and so get soft sanctions.
On 2nd May 2018, the EFL told Birmingham that since their forecasts were so bad and included player sales that hadn’t happened, they would be placed under soft sanctions and a Player Registration Embargo had been imposed on them. They would be allowed to sell players but not buy any.
At that time, the EFL told Birmingham that this would remain in place until the season had finished and the club were able to supply fully audited actual accounts showing that their true 3-year losses were indeed less than £39m.
Two events then occurred:
1/ Birmingham ignored this sanction and one month later bought Christian Pedersen. The EFL refused to register the player. Birmingham protested and tried to overturn the decision.
2/ Birmingham failed to sell the players necessary to reduce their losses and the revised actual 3-year total was almost £10m over the £39m limit.
As a result of the new information, and in support of a player who was an innocent party in the matter, the EFL registered Pedersen but charged Birmingham with breeches of P&S Rules and prosecuted them at a tribunal held by the Disciplinary Commission.
Birmingham’s Tribunal
At the tribunal Birmingham admitted “admitted that it was in breach of Rule 2.9 of the P&S Rules by incurring adjusted losses totalling £48.787 million over a monitoring period”.
Furthermore, Birmingham did not dispute they had signed Pedersen but claimed that the EFL rules were unclear and it could be interpreted that they had not been broken. The club’s CEO, Mr Ren, admitted that “Mr Lloyd [the club’s finance officer] had informed him by email that the Club could not sign new players”. However he also claimed that “The terms of the embargo were never fully set out in any document from the EFL before the interim breach letter dated 13 July 2018 [ie after Pedersen was signed], but I had understood it to be a provisional embargo on registering players to play at the Club”.
Birmingham had admitted the charges and its guilt; the evidence it gave was designed to mitigate any punishment.
Birmingham’s Punishment
There are guidelines for the clubs as to how many points are likely to be deducted but the Commission was clear that it is not bound by these guidelines and can impose whatever sanction it feels suitable.
The guidelines state that the Commission could impose a points deduction of 21 points; this number can be reduced after taking into account:
- How much the £39m loss limit was exceeded
- Trend showing losses were reducing over the 3-year period
- The severity of any aggravating factors
- Any mitigating circumstances
In Birmingham’s case, the loss excess was just under £10m which could suggest a 3 or 5 point reduction, their losses were increasing over the monitoring period (taken as an aggravating factor), the Pedersen case was found not proven and dismissed and they had been quick to admit their guilt and had been cooperative in matters since the breech.
Taking all those factors into account, the Commission ordered a 9 point deduction.
Summary
The Profit and Sustainability Rules came into force on 1st July 2016 and it would seem that clubs initially failed to grasp the consequences behind the “soft sanctions”. It seems that many clubs continued to work as if the only part that mattered was keeping losses below the upper threshold of £39m.
Birmingham City and Sheffield Wednesday are two clubs who have been affected badly by the soft sanctions and, while Sheffield Wednesday complied with the consequences of soft sanctions and escaped further punishment, Birmingham City thought they were “bigger than the EFL” and paid the price by receiving a points deduction.
The transfer activity across the Championship would seem to indicate that clubs are taking the new P&S Rules seriously now and doing more than just paying lip service to it.
Clubs worried they may exceed FFP limits are also now fully aware that a trend of increasing annual losses is an aggravating factor that will increase any points they could lose and many are changing their financial plans as a result.
Mike Thornton – 9th August 2019
Addendum for Leeds United fans: The last two published accounts show a small FFP profit in the first year becoming about breakeven in the second; last year is expected to be a FFP loss of up to £13m and without player sales this summer the loss for the current season was expected to be well in excess of £13m.
This trend of increasing losses is seen as an aggravating factor by the EFL when analysing submitted accounts and imposing soft sanctions and budgets. It can also badly affect any Disciplinary Commission’s sanctions.
Whilst I don’t expect us to be under soft sanctions at the moment, I had a different expectation of the EFL’s reaction next March without the Club’s intervention to manage FFP this summer.
The first, accompanying essay is here: