“The time for debate about the merits of a Regulator has passed; focus should now be on its scope and powers.” That’s the view taken by Nick De Marco KC, one of the UK’s leading sports law experts, after the publication of a government White Paper outlining plans for an independent regulator for English football (soccer).

The top-tier English Premier League is a hugely popular and commercial success, and is one of the UK’s most successful exports. But since it was established in 1992, over 60 clubs throughout the English league system have gone into administration. Some, like Bury FC and Macclesfield Town FC, have folded. Others, such as Derby County FC and Southend United FC, are on the brink of liquidation.

Self-regulation

The huge rewards at the top of the game have incentivised risk-taking as clubs scramble for a place at the table, with sustainable practice too often giving way to short-term gambles. Rules governing ownership have also been questioned as a succession of cases raised doubts over the effectiveness of football’s so-called fit and proper persons tests for prospective owners. Despite continuing problems, the football industry successfully argued it should be left to regulate itself.

The point has often been made that the US NFL, one of the few sporting competitions with similar financial and commercial heft to the Premier League, has voluntarily introduced measures such as the draft system and the salary cap to help the competition and its clubs remain sustainable. The Premier League has remained resolutely light touch.

The catalyst for change came in April 2021 when the top six Premier League clubs announced their intention to break away and join a European Super League. The move would have wrecked the English game and the Premier League itself, and prompted a huge backlash from football fans. The Super League plans fell apart under the pressure of opposition but the UK government decided enough was enough and set up a review of the way the game was run. That produced a White Paper entitled A Sustainable Future – Reforming Football Club Governance, which contained a recommendation to establish a statutorily underpinned Independent Regulator for English Football (IREF).

IREF is to be given powers to require action on club finances and governance structures. And it is the operation of this regulatory function that De Marco has considered in the latest edition of Blackstone Chambers’ Sports Law Bulletin.

It is worth taking a moment to consider the enormity of the proposal. The current UK government is one of the most pro-free market and light-touch regulation administrations in many years. And yet it has concluded, in the introduction to the White Paper, that: “Government intervention is needed to effect this reform. This is because the free market does not properly account for the full social value of clubs to their fans and communities, and industry self-regulation has remained inadequate despite countless opportunities to reform, and plenty of time to do so.”

Pragmatic balance

The Premier League still appears to believe it can prevent the imposition of a Regulator by presenting it as ‘government control of the game’ and warning of unintended consequences. But an independent regulator established by government with statutory powers does not equate to government control. De Marco’s view is that “The proposals in the White Paper strike a careful and pragmatic balance between the perceived need for reform by independent regulation backed with statutory powers, on the one hand, largely motivated by concerns about the financial unsustainability of many football clubs and the threats of breakaway leagues by the elite, and, on the other hand, the importance of allowing what is one of the UK’s best performing industries (at Premier League level at least) to continue to attract investment, thrive commercially and generate the highest viewing figures around the world.”

He points out that existing football regulators (the English Football Association (FA), European governing body UEFA, the Premier League, the English Football League – which runs the professional tiers below the top flight – and the National League, which handles the top tier of the semi-professional game – will not be replaced by IREF. Instead: “The Regulator’s scope will be limited primarily to financial sustainability and good governance.” And he notes that: “The White Paper frequently uses expressions such as ‘advocacy-first approach’ and ‘proportionality’ to denote the fact that it shall try and encourage football clubs to comply with various minimum standards, rather than jump in with punitive sanctions.”

The White Paper proposes four Threshold Conditions which must be met if clubs are to gain the licence needed.

• The club must have adequate financial and non-financial resources and controls in place, to meet committed spending and foreseeable risks.
• Persons at a club deemed to exercise significant decision-making influence must be fit and proper custodians.
• The club must have appropriate provisions for considering the interests of fans on key decisions, and issues of club heritage, on an ongoing basis.
• The club must agree to only compete in leagues and competitions that are approved by the Regulator based on predetermined criteria.

If those conditions are not met a club could, by law, be prevented from playing professional football in the UK.

For many supporters of reform, one key test of any new system was ‘would it prevent a breakaway league?’ The requirement that clubs only compete in competitions approved by the Regulator indicates it would. De Marco considers whether this is effectively “preventing innovation by regulation” and concludes that the suggested criteria for “approved competition” would allow the regulator to accept new competitions if they, for example, remained part of the current structure of English football that links the grass roots to the top of the game. Furthermore, the application of criteria for approved competitions provides the opportunity to argue that any infringements on new competition “may generate objective economic benefits that outweigh the negative effects of restriction of competition”.

The argument about whether the establishment of an independent regulator with statutory powers equates to state control contains a large element of subjectivity, but the worry that such a move could contravene the rules of world football governing body FIFA has also been raised in some quarters. FIFA’s Article 19(1) states: “Each member association shall manage its affairs independently and without undue influence from third parties.”

De Marco observes that FIFA’s usual focus when looking into “undue influence from third parties” has been “on influence of the administration of the association itself, rather than on the matters it regulates”. He also notes that “it is significant that thus far FIFA itself has not raised any concern about the proposals”.

Proposals relating to financial regulation are arguably the most vital, given the parlous state of club finances and the incentives to short-termism that currently exist, as we observed earlier. De Marco is pleased the White Paper adopts a “light touch” approach that eschews the complexity of, for example, UEFA’s Financial Fair Play framework. He sees the approach as one that seeks to “encourage and ultimately to ensure (through the Licensing conditions) better financial planning and reporting by clubs”.

Many of the proposals in this area are little more than what De Marco calls “a sensible approach to the management of large companies”, but the fact that a regulatory approach is needed to achieve this will tell its own story for many observers. The new obligations will mean many more clubs will have to recruit more finance professionals, and this will provide a further strain on resources for smaller clubs further down the league. One suspects there are more discussions to come over how financial regulation will operate and what should be expected depending on the size of the club involved.

There is also complexity in how the proposed regulator’s role would work with financial rules already operated by UEFA, the English Football League and the Premier League. The White Paper clearly states that it sees its proposals interacting with existing league rules, but it also says “domestic leagues could still apply financial rules aimed at delivering fair competition, but the Regulator might take a view if certain rules risked cutting across its own financial resilience regulation”.

Competitive balance

As De Marco observes, some league financial regulation actually reinforces competitive imbalance. What’s more, the “stated aims” of those rules “are not about competitive balance at all, but about financial sustainability, precisely what the Regulator should be concerned with”. Given this, De Marco asks: “Might this lead to the Regulator erecting and enforcing barriers that dilute the leagues’ powers to introduce further cost-restraining financial rules?”

Proposals on club ownership were among the most eagerly awaited, given the long history of questionable individuals who have been allowed to take control of football clubs, and current debates over ownership by nation states, state-backed investment vehicles and hedge funds. IT is proposed that the Regulator will have responsibility for a new Owners’ and Directors’ Test (OADT) that draws on fit and proper persons tests currently applied by other regulators including the FCA, HMRC, the Solicitors Regulation Authority and the Bar Standards Board.

Someone’s status as a Politically-Exposed Person “may be considered as part of an in-the-round assessment” according to the White Paper, and the Regulator may be given additional powers to identify the source of a prospective owner’s wealth by exchanging information with other regulators. De Marco observes that consideration is still being given to whether the Regulator should be given powers to set tougher restrictions around leveraged buyouts, and says that care needs to be taken that this doesn’t prevent investment unless there is clear evidence such a buyout would make a club unsustainable. If it does, he thinks, the current regulatory powers suggested should be sufficient.

“These basic public law duties are important to guarantee the Regulator acts independently, proportionally and consistently.”

Nick De Marco, Blackstone Chambers

De Marco provides some consideration of the practical exercise of the Regulator’s powers, which he considers move from “advocacy first and proportionality” to enforcement and finally disqualification. “Significantly,” he writes, “the examples given in the White Paper focus on the disqualification of ‘those in charge’ of a club, rather than the club itself”.

The power to impose sporting sanction such as points deductions remains with the leagues. The Regulator’s sanctions on clubs and individuals will be reputational (naming and shaming) and financial. In the final instance, the Regulator will be able to disqualify clubs or individuals via withdrawal of licence.

While decisions of the Regulator are to be subject to judicial review, De Marco thinks there should also be “some system of disciplinary tribunals or merits appeals”. On the subject of procedural safeguards, he notes the following:

• The Government may bring in non-binding guidance with additional instruction on the operation of the Regulator, and it’s likely the Regulator will have a duty to adhere to this guidance.
• The Regulator will have a “duty to consult” affected stakeholders before taking certain key decisions.
• There should be set thresholds in place before any enforcement action is taken.
• Deadlines will be put in place for certain functions, such as the application of the OADT.

As De Marco writes: “These basic public law duties are important to guarantee the Regulator acts independently, proportionally and consistently.”

As with so many areas of regulation, the routes between principle, aspiration, application and consequence are fascinating. And vital for those charged with implementing the process. The proposed IREF is new territory, but will need to draw on the principles and experience of regulation in other sectors.

De Marco concludes: “The challenge… shall be to make sure the Regulator is properly funded and equipped with experts able to deal with our often complex, quite particular, rarely out of the public spotlight, highly successful yet dangerously precarious, but always dynamic, football industry.”