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Leeds United: A brave new world of financial fair play

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Phil Hay looks in detail at the Football League’s financial fair play rules and the impact they are already having.

You know that Financial Fair Play is seeping into the Championship’s consciousness when Leicester City start working to the letter of the law.

The richest club outside the Premier League, or one of them, have broken the habit of spending as they please, in a summer when their manager Nigel Pearson has signed only two players.

Pearson discussed FFP after Sunday’s 0-0 draw with Leeds United, saying he and his board were committed to making it work. “Don’t expect wholesale changes here,” he said, “because there won’t be any. We have our own strategy for coming into line with Financial Fair Play.”

There was a time when Leicester invested in their squad without caution. The summer of 2011, a period in which Sven-Goran Eriksson threw money around, made them outright favourites for the Championship title. But the Football League’s introduction of FFP – rules agreed with the support of a majority of second-tier clubs – is already taking effect.

FFP regulations were applied for the first time in 2012 but the Football League agreed that failure to comply with its guidelines would result in no penalty this season or last. The governing body gave Championship clubs two years to get their houses in order and will, in theory, mete out meaningful punishments from January 2015 onwards. Clubs who break FFP rules face a transfer embargo in that window.

A new report released by accountancy firm BDO, which surveyed 66 “financial directors” employed by England’s professional clubs, found that 85 per cent of teams expect to comply with FFP rules this season. Among Premier League and Championship sides, 83 per cent intended to maintain the same wage bill during 2013-14 or reduce it. Only one fifth planned to increase their transfer budget or believed they would have the funds to do so.

The situation at Elland Road and the tight rein on transfers at Leeds United is altogether more complicated but FFP is in part behind the attempt by United owner GFH Capital to hold down a wage bill which crept over £15million in the past 12 months.

That figure equates to around half of United’s annual turnover – far below the cost of salaries burdening many English clubs – but Leeds’ most recent accounts showed a shortage of excess cash. The club made a £317,000 profit during the 2011-12 financial year but posted an operating loss of £3.3million. Selling Max Gradel and Jonathan Howson kept them in the black.

Attendances at Elland Road dipped badly last season and the difference between a profit and a loss in 2012-13 might well be GFH Capital’s own investment. The club are known to be concerned about breaching FFP regulations should the wage bill climb any higher. The resulting impact on the transfer plans of manager Brian McDermott has been plain to see.

FFP rules governing the Championship are designed to limit both the losses a club incur and the investment permitted by owners and directors.

In the 2014-15 reporting period, when FFP in effect goes live, clubs will comply if their losses for the current term are no more than £3million and the injection of “equity contributions” from board members does not exceed £5million.

In other words, if United lose £6million then GFH Capital, or the board at Leeds as a whole, will be required to find £3million to meet Football League guidelines. If their losses run to more than £8million, United would automatically breach what the Football League calls its “total acceptable deviation” limit – £3million of losses plus £5million of private investment. The governing body would then introduce a transfer embargo as punishment.

Certain costs do not count towards a breach: youth development, community projects and, somewhat surprisingly, promotion bonuses.

There are, even to the untrained eye, glaring anomalies in the Football League. How, for example, can Queens Park Rangers spend £4million on Charlie Austin, £3million on Scott Parker, potentially another £6million on Jermain Defoe and still comply with FFP at a time when relegation from the Premier League has decimated their income?

In the short-term, QPR are protected by a clause which says FFP punishments will not be imposed on relegated clubs during their first year in the Championship. The club are also safe in the knowledge that the Football League would be unable to apply a transfer embargo were the West London club to return to the Premier League before sanctions kick in.

Clubs promoted to the Premier League will instead be hit with a ‘Fair Play Tax’ – a fine based on a percentage of the sum by which that club broke the total acceptable deviation limit. That threat is unlikely to worry any board with top-flight income. QPR’s investment indicates that they hope to leave the Football League in time to avoid serious trouble.

It is their good fortune that owner Tony Fernandes has chosen to stick around. BDO’s FFP survey found that 28 per cent of Championship club shareholders are considering selling up or relinquishing part of their stakes in the next 12 to 18 months as financial pressure outside the Premier League grows.

“Due to minimal resources we now see around a third of existing owners seeking a full or partial exit,” said BDO partner Billy Cairns. “Football clubs continue to attract huge interest but when it comes to the crunch only a limited number of investors have the resources and appetite to bankroll their club’s ambitions.

“This may see clubs go back to basics with overly ambitious promises of silverware traded for closer ties and greater financial stability – a backlash against the profligacy of previous regimes. The challenge will be to balance that with the continued demand of the fans’ desire for success.”