EFL League One and League Two draft Salary Cap rules Points for consideration Introduction The PFA has long supported the principles of cost control measures in their objective of ensuring the financial sustainability of EFL clubs. We recognise the need for a well defined and implemented set of regulations and we believe further consideration is required to meet the objectives of all stakeholders before proceeding with the implementation of the EFL’s draft Salary Cap rules for Leagues One and Two Following receipt by the PFA of the the years, the PFA has also contributed in assisting We have asked the independent Sports Business EFL’s draft Salary Cap rules (the the financial position of many EFL clubs through Group at Deloitte (who most recently assisted ‘draft rules’) dated 29th July 2020 for the provision of financial support. We want to see us with the financial review exercise as part of League One and League Two clubs, English football operate in a sustainable manner the response to Covid-19) to provide us with the the PFA have reviewed the draft – this is to the benefit of our Members, but also to principles of cost control measures to inform the rules and present this document for consideration that of all stakeholders across the game. content of this document, based on their experience and discussion. We understand that a vote is to of assisting multiple stakeholders in the development take place on Friday 7th August, where the draft We are not opposed to the principles of cost of cost control regulations across the sports industry. rules may become formalised regulations. For the control measures nor a well thought out, carefully reasons set out in this document, we believe developed and rigorously monitored system of that further consideration is required, before financial controls that promotes sustainability. proceeding with that vote. However, since receiving the draft rules last week, we feel it necessary to raise some of our We are sure that many will consider this fundamental concerns at this stage. document an attempt by the PFA to simply block progress or evidence that we are too far removed This document is intended to outline those concerns from the financial realities of English football. This in a clear and understandable manner and not merely could not be further from the truth - we understand to act as process delay. We are seeking to avoid that financial sustainability has been tough to a situation where the draft rules are formalised achieve and respect that the recent Covid-19 and adopted and then subsequently proven to be pandemic has merely served to exacerbate many misconceived and/or not appropriately adhered of the financial issues being faced by EFL Clubs. to or effectively monitored. Whilst we make no apologies for continually striving to protect the interests of our Members, through Introduction In order to clearly communicate our response to the draft rules, we have structured this document as follows, providing: • A high-level summary of the financial trends for League One and League Two and some key factors that we believe should be considered in the development of cost control measures in respect of player salaries; • An outline of the process that we would have expected the EFL to have taken in order to design and develop effective cost control measures; • An overview of the principles that we consider to be pivotal in the development of the draft rules and whether in our view they have been addressed; • What we consider to be the essential points for consideration that we believe it is important to understand further at this stage; and • Our recommended next steps. Financial trends in League One & League Two The financial performance of clubs in League One and League Two has remained relatively consistent in the last ten years with revenue growth being matched by increases in staff costs. Financial disparity is prevalent with the average ratio of top to bottom revenue generators being 7:1 in League One and 3:1 in League Two between 2014/15 and 2018/19 As the draft rules are being developed, it is important to consider the financial context to which they will be applied and there are a number of factors relevant to League One and League Two that we believe are important considerations. Financial and operational polarisation is significant within League One and League Two There are notable disparities between League One and League Two clubs within their respective leagues, both in scale (using attendance as a proxy) and financially: • 2019/20 League One attendance ratio (top vs. bottom): 11:1 • 2019/20 League Two attendance ratio (top vs. bottom): 7:1 • 2018/19 League One revenue ratio (top vs. bottom): 15:1 • 2018/19 League Two revenue ratio (top vs. bottom): 3:1 • Whilst this is exacerbated by the presence of specific clubs (e.g Sunderland), the average ratio of the highest to lowest revenue generating clubs has been 7:1 for League One and 3:1 for League Two over the last 5 seasons (to 2018/19), demonstrating that this is a recurring theme. Financial trends in League One & League Two The financial performance of clubs in League One and League Two has remained relatively consistent in the last ten years with revenue growth being matched by increases in staff costs. Financial disparity is prevalent with the average ratio of top to bottom revenue generators being 7:1 in League One and 3:1 in League Two between 2014/15 and 2018/19 Wage growth has not increased at a rate faster than revenue. The revenue and wage growth of League One and League Two clubs have historically been closely correlated, with revenue in each league growing at a CAGR of 4% between 2008/09 and 2018/19, while wages in League One and League Two have grown at similar levels, 3% and 4% respectively. The level of financial transparency means it is challenging to fully understand the actual level of player wage spend amongst clubs There is currently a lack of transparency in respect of the financial information available for League One and League Two clubs: • No League One or League Two clubs disclose player salary costs in their accounts. • For the most recently available accounts of League One and League Two clubs, only 71% of League One clubs for the 2018/19 season disclosed full accounts. This falls to 29% in League Two. The process required to develop effective cost control regulations in sport A comprehensive understanding of the current situation, detailed financial modelling of potential impacts and an iterative consultation process are critical factors employed by others sports regulators in the development of financial regulations The three phases indicated below are those typically associated with the development of effective Cost Control regulations in sport from concept through to implementation. From the information we have been provided, we understand that the EFL is currently in Phase 2, but we have not been provided with evidence of Phase 1 having fully taken place, nor any plan for completion of Phase 2 or Phase 3. We outline the risks associated with this more full on pages [6 and 7]. Phase 1 Define the key objectives of the regulations Defining the regulations Evidence the need for new regulations (current situation analysis, including financial modelling) Agree key principles of new rules Agree timing of implementation and any transition arrangements Phase 2 Define project outputs and establish project plan Process development and first time Stakeholder consultations implementation Drafting of regulations Current status vActions to mitigate risk of legal challenge of the EFL’s draft rules Reporting materials / templates and guidance for teams Resources for regulatory development and implementation Continued > The process required to develop effective cost control regulations in sport Continued... Phase 3 Phase 3 develops an effective compliance monitoring and enforcement process with key areas to consider including: Compliance monitoring • The annual process of information submission for monitoring and assessment; and enforcement • Where necessary, the application of investigatory powers by the regulator (and/or an independent third party assessor); • Decision making processes for alleged breaches of the regulations; • The adjudication process by an appropriate disciplinary body (and the types of sanctions available) • The resources available for monitoring and enforcement and appropriate additional support (i.e. independent auditors and legal advisors). • Continuing application of good governance to ensure separation of compliance monitoring / enforcement and adjudication The process required to develop cost control regulations in sport The risk of not following an appropriately rigorous process is that the regulations are either not appropriate for the specificities of that sporting competition or they become open to challenge, misinterpretation and difficulties in enforcing To mitigate against the risk of ineffective regulation, the first phase of the regulatory development process for other sports competitions has typically: i taken in the region of 11 to 25 months (elapsed time between initial feasibility considerations and approval of the new regulations); ii. involved several rounds of stakeholder consultations; iii. utilised a variety of approaches to help build understanding and consensus prior to being voted upon; and iv. resulted in a regulatory framework incorporated into the regulations and supplemented by documentation outside of the regulations providing guidance and clarity to stakeholders. The process required to develop cost control regulations in sport The timelines of the development of cost control regulations for three major stakeholders in sport are shown below. Whilst it is not our view that the EFL needs to take its time for the sake of it, we would recommend that further consideration is given to how understanding and consensus can be achieved at this stage.