Football Governance: Independent Regulator

The plan for a regulator, recommended by a fan-led review (the “Review”) last year, has been confirmed by the UK government. Preventing historic clubs from going out of business is one of the aims, as well as giving fans greater input and a new owners’ and directors’ test.

This White Paper builds on those recommendations and outlines a comprehensive plan to introduce an independent regulator (“Regulator”) for English football clubs. In theory, it will be a Regulator that is free from the vested and conflicting interests that have hindered progress in the past, and one that makes sure football works for its fans and communities.

The main purposes of the proposed Regulator will be:

• Stopping English clubs from joining closed-shop competitions, which are judged to harm the domestic game.

• Preventing a repeat of financial failings seen at numerous clubs, notably the collapses of Bury and Macclesfield.

• Introducing a more stringent owners’ and directors’ test to protect clubs and fans.

• Giving fans the power to stop owners from changing a club’s name, badge and traditional kit colours.

• Ensuring a fair distribution of money filters down the English football pyramid from the Premier League.

Issues

In short, the government believes there is an unacceptably high and growing risk of financial failure among football clubs throughout English men’s professional football. This, and the risk of breakaway competitions, threatens the stability of the football pyramid. Many clubs lack resilience against financial ‘shocks’, as Chelsea and Derby have highlighted.

Furthermore, breakaway competitions represent another potential shock to the market. Proposals like the European Super League would exclusively benefit a small number of clubs at the expense of others.

Intervention

Fans

The government believes that clubs play a pivotal role in many communities. Which is true. Fans of these clubs have deep emotional and social connections to their club. In economic terms, this means when their club ceases to exist, they will not substitute for an alternative ‘supplier’.

Communities

Football clubs are community assets with cultural heritage value. In addition to the direct and indirect economic benefits they deliver to local areas, they benefit the local and wider society.

Government

The Football Creditors Rule also affects HMRC. HMRC estimates that administrations at EFL clubs have contributed to the UK Government being unable to collect nearly £30 million in unpaid taxes since 2019.

Football clubs are more community and heritage assets than typical businesses, with fans rather than consumers. As such, football clubs should not be left to fail. However, if football continues on its current trajectory there is a material risk of further and extensive financial failures.

Industry self-regulation

Many problems in football are not new. However, despite repeated calls for reform, neither clubs nor leagues have taken the necessary actions to transform. As such, the government is of the view that football alone warrants intervention.

Independent regulator

Several options were considered, but none were considered independent of influence or that reforms would be guaranteed long-term. In contrast, the UK government believes that there has been widespread public support for a Regulator, including from fans and football finance experts. The UK government has also heard from football investors, club owners, and representatives of the EFL and National League who all support a new statutory independent regulator.

The government will seek to introduce the Regulator to reform the culture of governance in English football clubs and mitigate the risk of clubs being entirely lost to fans and communities. It would have three secondary duties, to have regard to:

1. Domestic competition,
2. International competitiveness, and
3. Investment. This would ensure it balances these objectives when striving for its primary purpose.

Furthermore, the government believes regulated clubs should bear the cost of regulation. Therefore, the Regulator would be funded by a levy on clubs proportionate to their revenue.

Scope

The Regulator will consider the top 5 tiers of the English men’s football pyramid. It’s unclear where the Regulator will be housed (i.e. government department or a football body). Nevertheless, the government believes that football has shown itself incapable of sufficient reform and of taking the necessary decisions for the good of the whole pyramid. The governance arrangements mean football has the wrong incentives and is therefore unlikely to deliver the protections the game needs.

Framework

The Regulator would set detailed Specific Licence Conditions to clubs, under each Threshold Condition as set out below:

1. Appropriate resources – The club must have adequate financial and non-financial resources and controls in place, to meet committed spending and foreseeable risks.

• Fit and proper custodians – Persons at a club deemed to exercise significant decision-making influence must be fit and proper custodians.

• Fan interests – The club must have appropriate provisions for considering the interests of fans on key decisions, and issues of club heritage, on an ongoing basis.

• Approved competitions – The club must agree to only compete in leagues and competitions that are approved by the Regulator based on predetermined criteria

While the four Threshold Conditions above would be set in legislation, there will be detailed requirements underlying each called Specific Licence Conditions which would be determined by the Regulator. Clubs would have to comply with these Specific Licence Conditions in order to meet the overarching Threshold Condition.

Four Pillars

There are 4 proposed pillars and foundations for reform, these being:

1. Financial regulation

Clubs would be required to demonstrate good basic financial practices and have appropriate financial resources or ‘buffers’ to enable the club to meet cash flows in the event of a financial shock, and to be able to protect the core assets and value of the club – such as the stadium.

This regulation would be delivered through the Regulator’s licensing system under the first Threshold Condition of ‘Appropriate Resources’. The Regulator will also want to see that clubs can demonstrate and have in place good contingency/scenario planning, multi-year forecasting, monitoring, and reporting procedures.

• Corporate governance

The Review found poor internal governance at clubs allowed owners to act unilaterally, pursuing short-term interests with little accountability or scrutiny. The Regulator should seek to improve corporate governance through the creation of a compulsory ‘Football Club Corporate Governance Code’. Compliance with the code would be enforced through the ‘Appropriate resources’ Threshold Condition.

The Football Club Corporate Governance Code would draw on established corporate governance principles applied in other industries. The Football Club Corporate Governance Code would adopt a tiered approach to accommodate the vast difference in scale and resources of the clubs across the pyramid. Each tier would have a different level of requirements.

The government believes corporate governance will not be an unnecessary burden. Rather, corporate governance is an opportunity for clubs, helping them to achieve better business outcomes, risk management and transparency for fans. There will be a requirement for clubs to report and publish on corporate governance annually.

• Owners and Directors’ Tests

The Review found examples of unsuitable custodians, including owners with long histories of business bankruptcies, owners with serious criminal convictions, owners later imprisoned for crimes including money laundering, and directors recruited without a proper, transparent appointment process.

To address these shortcomings, the Regulator would establish new owners’ and directors’ tests consisting of three key elements:

• a fitness and propriety test (owners and directors),
• enhanced due diligence of source of wealth (owners); and
• a requirement for robust financial plans (owners)

The Regulator would establish and implement new tests for owners and directors, which would be enforced through the ‘Fit and proper custodians’ Threshold Condition.

Tests would consist of three key elements:

1. fitness and propriety test (owners and directors);
2. enhanced due diligence of source of wealth (owners); and
3. a requirement for robust financial plans (owners).

• Fan engagement and club heritage

The Regulator would set a minimum standard of fan engagement as part of its licensing regime through the ‘Fan interests’ Threshold Condition, in line with the aims of the Review. This would require clubs to have a framework in place to regularly meet a representative group of fans to discuss key strategic matters at the club, and other issues of interest to supporters (including club heritage).

Clubs will need to satisfy the Regulator that they have appropriate and proportionate provisions for considering the interests of fans on key decisions and issues of club heritage. Clubs will need to show they are regularly consulting a representative group of fans on key strategic matters at the club, and other issues of interest to supporters (including club heritage).

Financial distributions

English football clubs have been highly successful in growing their income. Combined revenues across the top four men’s leagues. Despite this, analysis of the financial health of English clubs indicates that a large number of clubs struggle to remain financially viable without the help of external owner funding.

A football-led solution to solving distributional issues remains the strongly preferred outcome both now, and for the future. Both the Premier League and EFL agree that a greater quantum of cash needs to flow through the pyramid, alongside cost controls, in order to achieve the financial sustainability that is so urgently needed.

The Regulator will undertake a periodic assessment of how the industry is working and the health of finances. Any Regulator intervention would only come after the market has been given adequate opportunity to reach a settlement. This could potentially involve an arbitral process whereby the Regulator would set out the terms of the process, including the issues that any financing would need to address.

Conclusion

The government is due to go through a process of targeted engagement and consultation with key tenets identified in the White Paper. Targeted consultation will take place shortly, following the publication of the White Paper. Alongside this, the government is to continue to draw on advice from legal, regulatory and industry experts.

On one hand, the White Paper should be applauded for attempting to tackle the endemic failings within professional football in England once and for all. Given the recent financial issues facing Premier League clubs such as Man City and Chelsea, as well as EFL clubs such as Derby County, Bury and Macclesfield, it is clear that stakeholders who currently administer and run professional football clubs in England have made a poor job of doing so.

The Review offered a unique opportunity to understand the views and concerns of stakeholders across football and beyond. However, the White Paper and its contents will be viewed with hostility by many stakeholders within the game given the scale and scope of the proposed reforms. These same stakeholders will be required to implement the proposed changes. Ultimately, the Regulator has been designed to deliver a shift in culture that puts fans back at the heart of the game. Only time will tell whether this shift can be achieved.  

The Government’s White Paper can be viewed here.