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Challenge to Football League financial controls one of many challenges likely to result in revised set of rules, says expert

Out-Law News | 28 Feb 2014 | 10:37 am | 5 min. read

A legal challenge launched by some unnamed Championship football clubs in England against rules that place financial restrictions on how they operate their business is one of a number of likely challenges to financial regulation across football, an expert has predicted.

Sports law expert Trevor Watkins of Pinsent Masons, the law firm behind Out-Law.com, said that the Football League's financial regulations were particularly likely to be "vulnerable" to challenge following the threat by 10 unspecified clubs to bring legal action if they were served with sanctions for non-compliance with those rules.

The threat was contained in a letter sent to the Football League's chief executive Shaun Harvey by legal representatives for the 10 clubs, according to a report by the Guardian. A spokesman for the Football League confirmed to Out-Law.com that the organisation would "vigorously defend" the current rules if a legal challenge is brought.

However, Watkins said that, for clubs operating in the Championship in particular, the current rules are having the greatest effect where the attraction of securing a place in the Premiership attracted owners who wanted to deploy funds to achieve that aim.

The rules set out to provide a structure that limits the amount of losses and equity investment that a club can make or receive in any season. Watkins believes that the rules are particularly vulnerable to challenge for not allowing unlimited equity investment into clubs by benefactors as part of their revenue. "Where a rule is introduced that is by its nature anti-competitive, any court will look at the purpose of the restriction and whether or not it is best met by the rule or an alternative less intrusive way of getting to the same result," said Watkins.

The expert said, though, that it was "ironic" that the new rules were voted in by the clubs themselves, including potentially some of those now objecting.

Financial rules for Football League clubs, which are those operating in the three divisions immediately below the Premier League in England, were agreed upon in April 2012, although the 2013/14 season is the first season in which sanctions for non-compliance can be applied. The three divisions are known as the Championship, League One and League Two. Separate financial controls are in place for Premier League clubs.

The regulations require clubs in the Championship to stay within defined limits on losses made throughout a season. By the 2015/16 season, Championship clubs will not be able to lose more than £2m in a year if they want to avoid potential sanctions. The cap on losses can be exceeded where additional losses are made in making investments into certain areas of club infrastructure, such as youth development.

Punishment for failing to adhere to the rules will result in League One and Two clubs having restrictions placed on their transfer activity, whilst clubs higher up in the Championship face sanctions that will vary – a transfer embargo for clubs remaining in the competition and a fine for those who are promoted.

Clubs promoted to the Premier League that break the Football League's financial rules the season before would have to pay a 'fair play tax' on losses beyond the set limits. Rule-breaking clubs that continue to operate in the Championship the following season would be unable to buy any players until they could demonstrate their compliance with the rules.

Under the rules, each Football League club must submit their accounts for the previous season for scrutiny by the Football League by 1 December each year.

"The challenge to these rules seems to be rooted in the fact that many Championship clubs are suffering with a huge gap between earnings in both divisions," Watkins said. "The growing disparity in value between the broadcasting rights deals concluded by the Premier League and the Football League exaggerates the effect." "The decoupling of the Premier League from the Football League in 1992 and the separation of broadcasting rights deals that stemmed from this division has had a considerable and ongoing impact. With the benefit of hindsight different decisions may well have been made at the time."

"Some Championship clubs with aspirations of playing Premier League football clearly feel pressure to spend money on their squad to boost their hopes of promotion in an effort to gain access the extra revenues on offer. They believe they should not be hamstrung from meeting those ambitions because of rules that prevent them spending as much money on enhancing their squads as others," he added.

Watkins re-iterated that there was a good chance that elements of the rules put in place by the Football League would be deemed anti-competitive and in breach of EU rules if they are subjected to challenge. He said that much would depend on what the actual aim of the rules is.

"Depending on who you speak to there are various objectives cited," Watkins said. "To understand whether they breach competition law, the aim needs to be established. Then the restriction needs to be assessed to see if it breaches the law and whether it is the least offensive way of meeting that objective.. Multiple reasons have been given, including to improve the financial health of clubs, reduce the susceptibility of clubs' financial situation to the whims of owners, and avoid insolvency events such as the ones experienced by Portsmouth."

Watkins concluded that in his view the rules do have legitimate aims but were too overpowering and should be "revised so as to rebalance the system and create a more level playing field".

"The Football League's rules exist alongside different financial control measures set by the Premier League as well as those set by UEFA for clubs wishing to compete in their pan-European competitions," Watkins said. "The difficulty in remodelling the Football League's regulations is in finding a way to reconcile the views of all 72 member clubs operating at different levels of the game and each with different aspirations, as well as ensuring that the rules run complementary to those imposed by the Premier League and UEFA."

"My main concern is with the failure to allow clubs with rich benefactors to invest equity at their level of choosing in those clubs where that investment does not put clubs at risk of going out of business," Watkins said. "No limits should be placed on equity injection. The imbalance created between those receiving or not receiving a parachute payment over a four year period, particularly in the latter stage of that cycle, also creates an imbalance. It would be sensible to adjust spending limits to enable other clubs to spend, safely and without endangering the club, to a level equating to the parachute sums payable."

"Giving smaller clubs the ability to compete more effectively and realise their ambitions by allowing them to balance their spending against equity investments by benefactors would also allow clubs a better chance to progress through the leagues, similar to what Fulham did under the stewardship of Mohamed Al-Fayed some years ago. Economic regulation should not have the effect of artificially preserving the status quo, where the rules benefit the bigger clubs over the smaller clubs. Where that happens, sport increases the chance of losing the element of unpredictability and its attractiveness to both fans and commercial partners," Watkins added.