How Financial Rules Impact UK Football Standings: Explained

Two football clubs face the risk of getting bumped from the UK’s top-tier league for breaching financial loss limits, with three more clubs under investigation.

It’s shining a spotlight on how league rules designed to prevent clubs from going bust are influencing club standings beyond their performance on the pitch. These rules are poised for a rethink as momentum gathers behind the need for change.

The league is confronted with changing a system that penalizes smaller clubs who have worked their way up from lower leagues and bars wealthy clubs from spending their owners’ money.

What’s happening?

Five clubs that are current or former members of the top tier of English football, the Premier League, have been docked points or are under investigation for breaking financial rules. Under Premier League rules, clubs can lose a maximum of £105 million ($133 million) over three years.

Independent commissions hired by the Premier League have docked points from Everton and Nottingham Forest this season for breaching the financial loss limit, meaning they risk demotion to second-tier football. Nottingham Forest is appealing the sanction. Everton faces further sanctions from a second investigation called by the league.

Leicester City, demoted to the second-tier last season, faces similar charges although it hasn’t been disclosed how much money the club has lost. Under a complex system, clubs can dock from their stated losses spending on things like infrastructure and women’s football, making the extent of Leicester’s losses unclear. The relevant losses will only be published when investigators reach a conclusion.

Two giants of the game, Manchester City and Chelsea, are also under investigation for charges that include disguising payments by their owners as commercial revenues to bring down their stated losses. However, while that might mean they broke the Premier League rules, it also shows that the rules are having effects beyond the stated intent of avoiding clubs going bust.

Chelsea self-reported financial rule-breaking under its former owner, the Russian oligarch Roman Abramovich.

The Manchester club faces more than 100 charges, including an allegation that it’s not cooperating with the Premier League investigation. That has led to speculation it could be kicked out of the league if found guilty.

Why so many all of a sudden?

There had been no points deductions for breaking the Premier League’s profit and sustainability rules until Everton was docked 10 points in November (cut to six on appeal).

However, Christina Philippou, accounting lecturer at Portsmouth University, said that this understates the level of financial problems at Premier League clubs. Of the original 22 league members in 1992, eight have entered bankruptcy administration, usually after they had been relegated to the second tier, she said. Clubs backed by wealthy owners are paying out more for players than they can afford from commercial revenues, such as gate receipts and television, alone.

Some of those problems are now bubbling into view. There are also shorter-term factors at play, according to Kieran Maguire, an accounting lecturer at Liverpool University who specializes in football finance. The common theme is that clubs over-spent on players after the pandemic hit football revenues hard, Maguire said.

The Premier League also has in effect sharply tightened its financial controls over the past decade because loss limits haven’t been changed since their introduction in 2013.

Multiply the loss limits by the amount that Premier League revenues have increased over that period and the three-year limit would now be more than £200 million ($253 million). “None of these clubs would be in trouble in that case,” Maguire said.

Are the clubs or rules causing problems?

There’s little doubt of club mismanagement and that some of them broke the rules.

Everton over-spent on players and performed worse than it expected on the pitch, hitting club revenues.

Nottingham Forest was promoted to the Premier League this season and bought more players than it could afford under the profit rules. Like Leicester, it was hit by the lower losses allowed in the second tier: £39 million ($49 million) over three years compared to more than £100 million ($127 million) in the Premier League.

“It’s up against teams like Chelsea and Manchester City whose squads cost more than £1 billion,” Maguire said.

Nottingham Forest’s squad had cost just £12 million ($15 million) when it was promoted from the second tier to the Premier League.

Nottingham Forest and Leicester are effectively banned from spending as much as bigger Premier League teams because of their time in the second tier, where revenues are also lower, making it hard for them to compete. Chelsea and Manchester City, meanwhile, both have wealthy owners who can afford bigger spending than the rules allow.

“The profit and sustainability rules are simply making it hard to challenge the old elite,” Maguire said.

Will the rules be changed?

The Premier League might change financial rules but would not comment on its specific plans. Clubs agreed at a March meeting to prioritize developing a new league-wide financial system.

Europe’s football governing body, the Union of European Football Associations, has rethought its own financial fair play rules to take a broader view than short-term profitability. In June, the union agreed to replace short-term loss limits with a new system that limits the amounts clubs can spend on players’ wages. From the 2023-24 season, squad costs will be capped at 90% of revenues, falling in stages to a permanent 70% by the 2025-26 season.

The Premier League looks likely to follow a similar path.

The league is considering the introduction of wage caps, with squad costs limited to around 85% of revenues. Squad costs could also be capped at a multiple of the bottom-placed team’s costs to avoid the Premier League being dominated by a few giants. Premier League teams are allowed a squad of up to 25 players from which to pick the 11 who play in a game.

The biggest English clubs already have to obey the UEFA rules to take part in European competitions such as the Champions’ League.

Will problems continue?

Few doubt that teams will continue to run up against the rules as wealthy owners try to buy success on the field.

Philippou said that wages amount to more than 100% of second-tier clubs’ revenues as they chase promotion to the top league.

Meanwhile, other clubs, like the Premier League’s Newcastle United, have almost unlimited spending power. Saudi Arabia’s sovereign wealth fund bought the club in 2021. But the financial rules prevent Newcastle from spending as much on players as its owners could afford.