So, how do you determine an 'appropriate' points deduction for Profit & Sustainability losses?
Perhaps the answer isn't to be found in having a 'perfect' number. Perhaps the answer is, as happened with clubs entering administration, letting everyone know and sticking to it.
So Everton are being deducted six points rather than ten, and that makes perfect sense. Indeed—and apologies to anybody who has already seen me rehash this on Twitter, but it really isn’t that often that I nail a prediction like this— ‘sense’ is really about the right word. About three weeks earlier, I’d plucked the number out of thin air myself as where I thought it would end up, based on vibes alone.
But that set me thinking. These thoughts don’t just appear from nowhere. So where did my ‘vibes’ come from? The most logical place to look for me—hang onto your hats, because you’re going on a brief sojourn into my thought processes—was administration. Allow me to explain. When you’re thinking of how you can possibly quantify the deduction of a number of points during the course of a season (in a football sense, ten points is three wins and a draw), where do you draw that line?
In that sense, the fact that deducting a team of a minimum of ten points for entering into administration makes for an interesting side-by-side comparison. It’s now a little over twenty years since they were ratified and a little less than twenty years since they came into effect, which is long enough for us to observe what the affects have been with some degree of clarity.
In 2009, Portsmouth became the first—and to date only—Premier League football club to enter into administration, but they suffered nine point deduction rather than ten handed out automatically to EFL clubs. This is because the Premier League season is 38 games rather than 46, and from this we might deduce that the deduction may reasonably be considered proportional, as a percentage of a season. It’s slightly higher proportionately for Premier League clubs at 0.237 points per game against 0.217 points per game for EFL clubs, but it’s as close as it could be, presumably by design. Of course, some have been docked considerably higher than this.
The rule was introduced in 2003 because of growing perception that clubs were gaming the system. Administration was introduced in the Insolvency Act 1986 as a last minute stop-gap to try and keep failing companies alive before liquidation. An account specialising in insolvency will be appointed to run the club and make whatever he needs to do in order to keep that company trading. If a buyer can be found and all debts paid, then all good.
But that’s not common. If it was as easy as that, they’d have done it first. More common is an agreement to pay back unsecured or preferential creditors back a percentage per pound of what they’re owed, sometimes in full straight away, but often under a Company Voluntary Arrangement (CVA). Certain debts are considered preferential creditors. HMRC were until 2002 and have been again since 2020, after following changes to the law. But in 2003, they just had to line up along with everyone else.
But the events of the early 2000s came to change the way in which it was dealt with in a football sense. The Football League had signed a three-year, £315m television deal with ITV Digital in 2000 which had looked too good to be true from the outset and turned out to be exactly that. In March 2002 the broadcaster collapsed altogether, still owing £180m. No-one else was going to pay that sort of money, and within weeks clubs started falling into administration. ITV Digital entered administration on the 27th March 2002. Halifax Town followed them, 13 days later.
Three clubs had entered into administration since the turn of the millennium and the collapse of ITV Digital. The next year alone brought seven. From a PR perspective, it was not a strong look for the game that so many clubs were in this position, certainly not when a lot of them didn’t seem to be skimping on player wages (redundancies would be commonplace at any other business in administration).
But it was the promotion of Leicester City at the end of the 2002/03 season that proved the turning point. In September 2002 Leicester entered administration, had their debts wiped, and went on to win the Championship and promotion to the Premier League regardless. Was it unethical? Well, you’d have to ask the small creditors that. But it wasn’t illegal, and they hadn’t broken any rules.
Other clubs were incandescent with the perception that Leicester had gamed the system while others spent less in order to make sure that they went nowhere near such a situation. There was also something of an ethical side to it all (though whether this was really felt by clubs is debatable); administration was supposed to be a rescue plan for companies in general financial distress, not an easy way to just wipe your slate clean.
Whatever the merits of it all, the decision to dock Premier League clubs nine points and EFL clubs ten for entering into administration was ratified at the end of September 2003 and came into effect at the end of the 2003/04 season. By the time it came into effect, 13 different EFL clubs—Bradford City did it twice—had been through a spell in administration, 18% of the EFL.
Did the new rules have any effect? They did. Wrexham were the first club to receive a ten point deduction for entering into administration in December 2004, but they were only of two that season alongside Cambridge United, who followed at the very end. The following season there were none during the season, with only Rotherham United right at the very end. Four clubs in three years, after 14 in the previous year and a half.
After contentious decisions over the timing of entering administration which were considered gaming the system at Leeds United and Boston United in 2007, from 2007/08, any club entering administration after the fourth Thursday in March would have their 10 point deduction deferred until the following season. If the club was relegated the points would be deducted from their tally at the start of the following season. If the club stayed up the 10 points would be taken off their final total for that which they’d just completed.
I can’t prove anything ‘scientifically’, here. I’ll leave that to the boffins. Ultimately, this is such a layered question that it’s probably impossible to get a completely objective answer to it. So we might as well just all admit that and move on. It is an attempt to rationalise this decision, because in a couple of respects it does have similarities. The deduction was numerically the same; 10 points (though it should be added that, since Premier League clubs are docked nine points for entering administration, these breaches could be considered 11.111% worse). It’s all related to finances. It’s worth looking at, particularly the ways in which they intersect and the ways in which they differ.
In the early 2020s, there has been growing concern at the way in which some clubs are spending money, and rules have become tighter across the board. Points deductions have become regular again in the EFL. Literally as I type these words, Reading have been issued with their third points deduction of this season alone (with another two point suspended deduction put in place), this time for failing to pay money to HMRC within a time limit set by the League.
But Premier League clubs were barely touched by the rules introduced from 2004. At the same time as they were introduced, parachute payments were also introduced to soften the landing of relegation. Portsmouth remain the only Premier League club to have entered administration and receive a points deduction for entering administration in February 2010, and their financial basketcasery was of a different magnitude to anything seen in the top flight of English football since the formation of the Premier League.
The Premier League’s Profit & Sustainability rules are more complex than those determining points deductions and insolvency events. The headline figure is that clubs are no longer allowed to make a loss no greater than £105m across their previous three seasons. But it’s not quite as simple as that. Clubs can only lose £15m of their own money across those three years. So that's no more than £15m extra on outgoings like transfer fees, player wages and, in a lot of clubs' cases, paying off former managers compared to their income from TV payments, season tickets, selling players and so on.
Anything above that, up to the £105m limit, must be guaranteed by their owners buying up shares, known as 'secure funding', which essentially means bankrolling the club. Under those circumstances, the Premier League require clubs to submit financial plans for the next two seasons. For clubs who have spent any of the last three seasons in the EFL, owners can only put in £8m of secure funding for those years, leaving an overall maximum annual loss of £13m for the seasons in question.
Clear so far?
Good.
It gets more complicated still. Costs which are incurred 'in the general interests of football', such as a club's infrastructure, their women's team and the cost of running their academy, are excluded from these calculations. And when clubs buy players, they usually employ amortisation—spreading the cost of that fee on a sliding scale over the duration of a player’s contract—to make them show as less on the account balance sheets. The Premier League, of course, narrowly voted to limit this to five years earlier this season. Oh yes, and there were also adjustments allowed for Covid-related expenditure.
Because this is the Premier League rather than the EFL, there has been little talk of the ‘survival’ of clubs. Instead, much of the talk has been about limiting what the ultra-wealthy can spend. To some—mostly the supporters of clubs owned by the ultra-wealthy who feel constrained by these rules—this is a caste system, a ‘cartel’ of traditional ‘big clubs’ self-preserving their own positions while preventing the ambitious from breaking through.
But to others, these rules are a necessary step to prevent further wage inflation and even less competition; in other words, to stop, say, nation state sovereign wealth funds or American hedge funds from simply ‘buying’ the league every season. Since Manchester City have won four of the last five Premier League titles, it may be valid to say that this is locking a stable door after at least one horse has bolted. It may also be argued that if clubs were serious about competition, they could go all in and institute a flat salary cap, meaning that each club would only be able to spend the same, fixed amount on wages every season.
There is an ethical argument over the administration deduction which makes sense. When HMRC were getting stiffed out of tax and NI money by clubs, that was money coming from the public purse. Your money and mine. There’s also the ethical argument from 2003, that clubs shouldn’t profit from building up and wiping out debts while others are trying to live within their means.
And it has been seen time and time again that there are real world costs to football clubs entering administration; to backroom staff being made redundant through desperate cost-cutting to small local traders ending up getting nothing or next to nothing from CVAs offering a couple of pennies in the pound which have been accepted by bigger creditors who can absorb such losses.
Perhaps when a football club falls foul of Profit & Sustainability rules in the Premier League, the circumstances are too different for a direct comparison to be made with administration. Why did, for me, six points feel right for Everton, while 10 felt a little on the harsh side and the Premier League itself was pushing for twelve? There have been acres of coverage given to this, to what’s right and what’s wrong, and to where that line should be drawn, but wherever you stand on that subject, one thing that surely does need to change is that feeling that they’re just making it up as they go along.
This is, of course, unfair… to a point. The Premier League offloads the decision for this to an independent commission. But the issue is that there was little indication given at the time that the rules were first announced of what sort of deductions clubs might incur. The ten pointer thrown at Everton was a surprise, because we were all blindly guessing beforehand. Had they said, “It’s going to be ten points” from the outset, perhaps this would have happened at either Everton or Nottingham Forest.
Perhaps it’s the complications and exemptions which are behind the bad will that has greeted this. In both of these cases, the clubs argued that the calculations were wrong. Forest said they wanted the summer to maximise their returns from the sale of Brennan Johnson. Everton tried to argue that one type of interest payment related to the construction of their new stadium should be included in their allowable losses.
At Everton in particular, the growth of the idea that the Premier League is “corrupt” has been an effective deflection tool for Farhad Moshiri, whose ownership had been widely recognised as reckless by outsiders for years. But this seems to have made little difference in the perception that dark forces have been pushing this sort of decision-making.
At least having a definite amount which was known from the outset would have helped. And perhaps the lesson that can be learned from this debacle is that definiteness has its advantages. Whether you agree that a club should be docked ten points for entering into administration or not, we can all at least be certain that it will definitely happen.
And the same should be true in the case of Profit & Sustainability breaches. There is a date when the season ends, and when the new one starts. There is a fixed amount of allowable losses with fixed criteria. Everton contended they simply accounted for certain payments differently and disputed the interpretation of some of the accounting practices. Okay, well, if it’s required to re-write the rules to be clearer on what practices are acceptable and which aren’t, get it done.
What we can surely all agree on is that it’s surely absurd that any club should drop down a league table and then rise back up it slightly a few months later during the course of a season without a ball being kicked. It should surely be within the ken of the Premier League to set clearly definable parameters for this. We might not like where they set it, but at least we’d all know where we stand, and we don’t at the moment. And with Nottingham Forest’s fate set to be decided by the 5th April, and with any appeals to be decided by the 24th May, don’t think this is the last you’ve heard of it this season, either.
Typically sound analysis.
I do wonder if there needs to be some link between the seriousness/breadth of the violation and the punishment, though.
Just as a thought experiment, it seems unjust that a club guilty of one or two minor violations should suffer the same punishment as one guilty of dozens of serious breaches.
A relatively simple tiered system where the points deduction increases with the number/severity of the offences proven would make sense. Three tiers should be sufficient.
Similar principles are embedded in the US sentencing guidelines for financial crimes and other criminal law systems with equivalent mechanisms.