The UK government is currently considering proposals to introduce an independent football regulator to oversee club ownership and finances. This is a radical proposal that could have substantial implications for how football is governed in England and in other European countries, and potentially also for the governance of other sports. Drawing on Oxera’s 40 years of experience in economic regulation, this article considers the rationale for regulation and some of the potential challenges that a regulator might face.
There is a saying, generally attributed to the great Italian manager Arrigo Sacchi, that of all the unimportant things in life, football is the most important. Bill Shankly famously went further:1
Perhaps it is not surprising then that football is seen by some to be too important to be left to the free market.
Calls for an independent football regulator have come from many quarters—including fans (with more than 140,000 signatories on a recent parliamentary petition), pundits and ex-professionals (most vociferously, Gary Neville), an ex-FA chairman (David Bernstein), and a former governor of the Bank of England (Mervyn King, who, along with Bernstein, previously sat on Aston Villa’s board of directors).
In April, in the aftermath of the ill-fated attempt of some English clubs to join the ‘breakaway’ European Super League,2 the UK government announced a fan-led review of football governance, to be chaired by Tracey Crouch MP. The remit of the review was wide-ranging, including the efficacy of Owners’ and Directors’ Tests, the need for greater regulation and oversight of club finances, the distribution of revenue through the English football pyramid, measures to improve fan engagement, and protections around club heritage.3
The review has now concluded, with the findings and recommendations published in the last week of November.4 Its central recommendation is that the government should establish an independent regulator with a statutory objective of ‘ensuring English football is sustainable and competitive for the benefit of existing and future fans and the local communities football clubs serve’. The government will provide a full response in Spring 2022, but has already chosen to ‘endorse in principle’ the recommendation of an independent regulator.5
What ‘market failures’ might a regulator seek to address?
The first major question this prompts is whether economic regulation is really warranted in this market. By the review’s own admission, the Premier League has been highly successful in attracting investment, increasing the size of its global fanbase and generating greater revenues. These are not, typically speaking, indicators of a failing market.
The key concern is the extent to which this is sustainable. The view expressed by the fan-led review is that the incentives, lack of governance and recklessness of owners have resulted in clubs ‘gambling’ for success—outspending their income and accumulating debt in the hope of reaching the game’s top tier:6
But there is still a question of why this should merit a regulatory intervention—after all, most companies and their investors are allowed to decide for themselves how to run their businesses and the level of risk that they are willing to take on. The argument underpinning the review’s recommendation is essentially a ‘social value’ rationale for regulation. In short: if football clubs go out of business, the costs to society are high. In the words of the review:7
Given this ‘social value’, the review finds grounds for regulatory intervention with a view to ensuring that clubs are run in a financially sustainable way and do not come under financial distress in the future. The examples of Bury, Bolton Wanderers, Derby County, Macclesfield Town and Wigan Athletic are cited as cautionary tales of what may be around the corner absent intervention.
How would it do this?
Four potential options are considered in the report: (i) the status quo; (ii) an enhanced form of self-regulation; (iii) a co-regulation approach in which the football authorities would continue to govern themselves, but with additional legislative backing from government; and (iv) the establishment of an independent regulatory body.
The review unequivocally supports this final option, envisaging that the new regulatory authority would adopt the following measures.
- Administering a licensing regime. This would allow the authority to impose and enforce requirements with which clubs would need to comply. These licence conditions could be tailored to individual clubs and could change over time. This regime could also potentially be used to prevent clubs from forming breakaway leagues, such as the European Super League,8 through the threat of licence revocation.
- Applying financial regulation. A key role for the regulator would be to regulate the financial resilience of English football clubs. This could include requiring clubs to demonstrate that they have sufficient capital and liquidity to meet their financial obligations and withstand shocks, monitoring of and reporting on club’s financial performance, designing and enforcing cost controls, and stress-testing club’s business plans.
- Imposing tighter controls on ownership and governance. The review recommends that the regulator oversee a New Code for Football Governance based on the Sports Governance Code. It would also oversee new Owners’ and Directors’ tests to assess the suitability of prospective owners as custodians of important community assets. A further recommendation is that each club be required to provide a ‘Golden Share’ to a supporter representative as part of its articles of association. The club would be required to gain consent from the shareholder to undertake certain actions (e.g. changes to the club stadium, badge or proposals to join a new competition).
- Overseeing a ‘solidarity’ levy on transfer fees paid by Premier League clubs. These would be redistributed to lower-league clubs.
- Performing wider duties. These would include promoting equality, diversity and inclusion.
The review expressly states that the regulator would not have any responsibility for the commercial decisions of clubs (e.g. the prices of tickets and merchandise) or decisions relating to the laws of football.
There is less clarity regarding the role that the authority might play in relation to the distribution of broadcasting revenue across leagues. The review concludes that the distribution of income should be an issue that the Premier League and EFL resolves itself. However, it suggests that the regulator should be given backstop powers to intervene and impose a revenue distribution in the event that the football leagues are unable to reach their own agreement.
The review raises interesting questions as to when it is appropriate to regulate financial sustainability
While economic regulation is often thought of primarily as a means to address issues arising from market power (as in the case of infrastructure networks), it is not uncommon for regulation to be introduced to address externalities. There are a number of other examples of regulators assessing the financial resilience of market participants.
- The Bank of England’s Prudential Regulation Authority undertakes stress-testing of the financial health of large financial institutions (banks, building societies and insurers) and sets minimum requirements for their capital, liquidity and leverage ratios.
- The UK Financial Conduct Authority (FCA) is responsible for prudential regulation of around 50,000 firms including asset managers and investment firms.
- Ofcom—the UK regulator of the broadcasting, telecommunications and postal industries—assesses and reports on the financial sustainability of Royal Mail as part of its annual monitoring process.
- Network regulators (e.g. Ofwat and Ofgem in the UK) have generally left companies to make their own decisions regarding financial structure but are increasingly taking steps to monitor and promote financial resilience. Ofwat (the UK water industry regulator) is currently considering a number of options to strengthen financial resilience, including gearing caps, minimum credit rating requirements, dividend restrictions and increased transparency.9
- There is currently discussion of additional financial stress-testing for energy suppliers in Great Britain following the collapse of a number of firms in 2021. Similarly, the Water Industry Commission for Scotland (WICS) is implementing financial resilience measures for licensed providers in the non-household retail market.
In most of the above examples, the companies provide what are typically considered to be ‘essential services’ (e.g. water, energy, banking services). It is less clear that football clubs fit this categorisation.
This raises an interesting question for policymakers: when is a company or sector’s economic and social value so great that regulatory intervention is warranted? Social value can be difficult to quantify and compare across different sectors, and the review report does not attempt to quantify the economic and social costs of football club bankruptcies. There remains a valid question as to why football clubs are more deserving of financial regulation than other sectors. How does the social impact of the bankruptcy of Bury or Macclesfield Town football clubs compare to that of other culturally significant institutions that have ceased operations, such as music venues (e.g. Hammersmith Palais and the Hacienda), theatres or cinemas? Or to other long-standing businesses with large numbers of employees (like Debenhams) that have been forced to close?
These are challenging questions to answer from an economics perspective, but they are important considerations in assessing the case for regulation.
There is an opportunity to create much greater transparency over financial performance and resilience
The costs of introducing financial regulation are well known—collecting, analysing and monitoring financial information for the 92 teams in the English football league will be a significant undertaking that will consume management time and require a well-resourced regulator. (It is, however, worth remembering that the Prudential Regulation Authority monitors over 1,500 financial institutions and the FCA covers 50,000).
So what might this be expected to achieve? In the first instance, enhanced financial reporting has the potential to bring greater levels of transparency over the state of club finances, which in many cases are currently opaque. It is likely that clubs’ reporting would (if made public) be scrutinised not just by the regulator, but by highly engaged fanbases. This may generate pressure on owners to operate with increased financial discipline, though this is far from guaranteed. (The role of fans will be fascinating—will they be able to accept worse on-pitch performance and resist calling for new signings if they have greater understanding of the long-term financial risks of additional spending?)
Requirements for clubs to evidence the adequacy of their resources and produce stress-tested business plans may help to curb the short-term, high-risk financial overreaching identified by the review, and could therefore reduce the likelihood of clubs experiencing financial distress down the line. As a point of comparison, banks have considerably strengthened their balance sheets in response to the regulatory reforms implemented following the financial crisis (although this has also had the effect of increasing the cost of bank credit).
A challenging balance between financial resilience and a level playing field
The review notes a more challenging issue from a regulatory perspective—how to deal with owner subsidies at clubs with wealthy owners (e.g. Manchester City and Chelsea). Such clubs are likely to look very strong in terms of financial resilience if owners inject a lot of capital. However, their strong financial position may come at the expense of a level playing field for other clubs. The review proposes that the regulator would be able to block owner injections where it has objectively assessed that these will destabilise the sustainability of the wider league.
How this would work in practice, and the extent to which it is compatible with competition law, will be of interest to football fans and competition economists alike. However, experience from banking regulation suggests that designing a conceivable model to ‘objectively’ assess the impact of owner subsidies on the financial stability of the broader market is likely to be incredibly challenging.
Guaranteeing financial resilience is inherently difficult for a regulator
Media coverage around the proposals has referred to the ability of a regulator to ‘fix’ football finances and prevent a repeat of the recent insolvencies at clubs such as Bury FC. As noted above, greater financial regulation could potentially lead to improvements in transparency and financial discipline. However, without downplaying these potential benefits, it is important to be realistic regarding what regulators can and cannot do.
Experience from other sectors shows that it is generally much easier for a regulator to cap a company’s upside than it is to prop it up during downturns. This is particularly true in markets where the regulator does not have direct control over commercial decisions (e.g. it does not set price caps or assess costs). The tiered structure of football poses particular challenges in this regard. A club suffering multiple relegations in quick succession is likely to have considerable difficulty in aligning its costs to a much lower income (which could become an even greater issue under the review’s proposal to remove parachute payments for relegated clubs).
There is a fundamental question here: what supportive measures would the independent regulator be able to take if it identifies that a club’s financial sustainability is under threat?
This is not straightforward. The typical levers available to the regulator—e.g. points deductions, financial sanctions, and/or transfer bans—are likely to exacerbate, rather than improve, a financial problem (either directly or, indirectly, by affecting the club’s league position). Would it be able to compel the club’s owners to inject equity or to cut the cost base? It certainly seems unlikely that the regulator would be able to divert revenue (either from broadcasting rights or a transfer levy) to clubs experiencing financial distress and, even if it could, doing so would likely raise concerns around fairness and would risk creating perverse incentives.
Moreover, even in the context of truly ‘essential services’, regulators have not sought to guarantee that no firm ever faces financial difficulty (and the focus is instead generally on the orderly winding up of firms and the seamless transfer of customers).
In short, financial regulation may help to shine a light on potential issues at an early stage, thereby allowing for corrective action to be taken before it is too late in some instances, but there are limits on what regulators can do to support financial sustainability when such issues arise (as highlighted by the ongoing challenges in the GB energy supply market). It is important that these limits are recognised to ensure that expectations of the regulator are realistic.
The scope for unintended consequences is significant
The review helpfully identifies five key objectives that financial regulation would need to balance:
- ensuring long-term financial stability;
- avoiding monopolisation of leagues;
- promoting international competitiveness;
- minimising burdens on clubs or an expensive system;
- ensuring compatibility with other rules (for example UEFA).
The potential conflicts between these objectives are noticeable. As with any regulatory intervention, it will be critical to consider, and minimise, the risk of unintended consequences. One Premier League executive has already referred to the risk of regulation ‘killing the golden goose’10—but how great a threat is this?
In the case of cost (wage) controls, there are risks both in terms of:
- Distorting domestic competition. If wages were to be capped as a proportion of revenues (for example, if the wage bill could not be more than 70% of revenues), this may make it more difficult for smaller clubs to compete against the traditional ‘big six’. Take the example of Manchester United (with 2019/20 revenues of $651m) and West Ham ($180m). If both teams were to comply with such a cost control, and without a fundamental change in revenue sharing between Premier League clubs, Manchester United would be able to maintain a wage bill nearly four times greater than West Ham’s.
- Reducing international competitiveness. This is likely to be a key concern. English clubs compete with international clubs to attract finance and players. The labour market for footballers is international. If regulations are unevenly applied across nations—i.e. if Premier League clubs are subject to more onerous rules or cost controls than their European counterparts—Premier League clubs may lose ground on their international rivals. There are examples of this from other sports—for instance, salary caps in English rugby have led to players moving to the French league, where there is no regulation of salaries.
These are not necessarily insurmountable issues, but interventions would need to be thought through carefully.
The prospects for football regulation
The proposals for an independent football regulator are of considerable interest to many people. They reflect concerns from fans and other stakeholders that clubs are being run in a financially unsustainable way. However, there are legitimate questions as to the suitability of economic regulation to this market and the ability of the regulator to achieve the disparate objectives identified by the review.
Premier League clubs are likely to be concerned by the scope for England-specific proposals to distort their ability to compete with foreign clubs, given European competitions are a large part of the major clubs’ businesses. As the UK government seeks to take these proposals forward, Oxera is among the many who will be watching this space with interest.
2 Regarding the Super League, see Oxera (2021), ‘They think it’s all over… Economic dynamics behind the European Super League’, Agenda, May.
3 Department for Digital, Culture, Media & Sport (2021), ‘Terms of reference for the fan-led review of football governance’, 22 April.
4 Independent Fan Led Review of Football Governance (2021), ‘Fan led Review of Football Governance’, November.
5 Dorries, N. (2021), ‘Fan-Led Review of Football Governance – final report and recommendations’, Written statement to Parliament, 25 November.
6 Independent Fan Led Review of Football Governance (2021), op. cit., p. 28, para. 1.21.
7 Ibid., p. 24, para. 1.5.
8 For a discussion of economic considerations relating to the Super League, see Oxera (2021), ‘They think it’s all over… Economic dynamics behind the European Super League’, Agenda, May.
9 Ofwat (2021), ‘Financial resilience in the water sector: a discussion paper’, December.