Analysis: If the EFL mirrored UEFA’s new cost controls only 11 of 113 Championship clubs would have complied

Back in April, UEFA approved a replacement of its Financial Fair Play system (FFP). There were three main tenets to the new Financial Sustainability and Club Licensing Regulations (FSCLR), with the primary one being ‘cost control’, a measure UEFA intends to achieve by the imposition of a ‘Squad Cost Ratio’ (SCR) on clubs participating in its competitions.

Around the same time, reports claimed the EFL were looking to mirror UEFA’s new ruling. Chiefly, the intent would be to replace existing sustainability controls present in the Championship with the division’s own SCR ruling.

No such replacement has been approved yet, but it seems likely to happen sooner rather than later. The Championship, as has been well documented, is a financial black hole for many clubs and their owners. Arresting the huge losses clubs incur each season looks likely to remain high on the EFL’s priority list.

To that end, Off The Pitch have analysed how the division might have looked had the SCR ruling been in place across the five Championship seasons from 2017 to 2021.

To start, it is worth considering what exactly the SCR – Squad Cost Ratio - is. Eventually, clubs will be limited to an SCR threshold of 70 per cent. Some have interpreted that as a flat wages-to-turnover metric, but the reality is a bit more complex. The ruling will consider not just clubs’ wage costs, but also their spending on transfers (by looking at amortisation and impairment charges in a given year) and the amounts expended on agent fees.

On the other side of the coin, profits (or losses) on player sales will be included alongside more traditional turnover, an inclusion which recognises the increasing important of player trading in many clubs’ business models.

Of 113 Championship clubs assessed (seven clubs either produced accounts with insufficient information, or no accounts at all) between 2017 and 2021, we found that just 11 would have complied with the 70 per cent threshold. What is more, four of those sides were relegated in their seasons of compliance.

The new regulations will be phased in gradually by UEFA, with the 70 per cent threshold not applying until the 2025/26 season. In 2023/24, clubs will be required to comply with the SCR limit set at 90 per cent. Even when we apply this to Championship clubs over the past five years, only 31 – or 27 per cent of all clubs considered – fell within that threshold.

There are mitigating circumstances and likely allowances that have not been catered for here, not least the impact of the Covid-19 pandemic. In 2021, a season in which grounds were mostly shuttered to fans, not a single Championship club would have successfully stayed within the 70 per cent limit. Yet our findings show that even before the pandemic, most clubs were nowhere close to compliance.

Across the five years, only four Championship clubs – Charlton Athletic, Hull City, Rotherham United and Barnsley – had an average SCR below 70 per cent. Tellingly, all of those clubs were relegated.

Perhaps more tellingly, some of the clubs with the highest SCR in the period were those in receipt of Premier League parachute payments. That reinforces an increasingly widely held view, and a reason the EFL are believed to be pushing for an end to parachute payments: far from acting as just a safety net following relegation, the payments distort costs in the second tier and allow relegated clubs to spend significant sums that others cannot.

It has long been known that squad costs in the Championship have spiralled out of control. Our findings help show the extent of saving that will be required to bring levels down to UEFA’s eventual SCR threshold.

From 2017 to 2021, all else being equal, we calculate Championship clubs would have required €2.1 billion in cost savings in order to each meet the 70 per cent threshold. That breaks down as €421 million a season, or €21 million per club considered per season. Covid had an undeniable impact on club finances, but the figures involved here are stark, and show just how much of an adjustment will be required should the cost controls be introduced.

In terms of adjustments, we also found that some form of adjustment period is likely to be required for relegated clubs – and especially so if those parachute payments are abolished. Even with those payments boosting turnover far beyond other clubs in the division, only one of the 15 relegated clubs would have met the SCR threshold in their first season after relegation.

Many relegated clubs spent significantly over the level the new ruling would have permitted. Several paid out promotion bonuses that may well be deemed a disallowable expense if the EFL does bring in an SCR limit, and Newcastle United booked a wage provision of over €30 million in 2017 that would doubtless have been treated differently under different sustainability rules.

Yet the fact so many relegated clubs are nowhere close to compliance even with those parachute payments softening the fall from the top tier suggests the gap between the two divisions is such that any new ruling will require an adjustment period for relegated clubs.

A further, related finding is one few are likely to have considered. The SCR’s inclusion of transfer fee amortisation and impairment charges is designed to limit clubs in their splurging on player purchases. But what of clubs who have tumbled out of the Premier League and find themselves unable to shift expensive squad members?

In 2020, for example, we found that Stoke City’s combined amortisation and impairment charge of €83 million would have made SCR compliance pretty much an impossibility. Stoke attributed €34 million of impairment to Covid-19’s impact on the transfer market, yet that still left a charge of €49 million against turnover of €57 million.

The Potters booked just €3.6 million in player sales profits that year meaning that, even with that €34 million of Covid-affected costs stripped out, they would have been limited to SCR-related costs of €42 million - €7 million less than the transfer fee-related costs they incurred in 2020. In essence, under the mooted rules, the club couldn’t have paid anything at all in wages because the ongoing costs from transfer fees incurred in the Premier League were so large.

Cost controls are evidently needed in the Championship, but implementing them also risks worsening the growing chasm between that division and the Premier League. Abolishing parachute payments would level the playing field in the second tier, but it would also ensure promoted clubs have a far greater leap to undertake to try and retain Premier League status.

Even with parachute payments included, we found the average SCR-relevant income for Championship clubs in 2021 was just €47.3 million. That pits the average allowable expenditure on squad costs at €33.4 million – a significant departure from the minimum €100 million we recently found clubs usually need to spend to avoid relegation from the Premier League.

In many ways, that problem of the gap between the Premier League seems intractable. The former generates vast sums of money which its clubs, rightly or wrongly, are unkeen on sharing too broadly with those below them. Yet without an uptick in the income of Championship clubs, the imposition of cost controls such as the SCR will only serve to crystallise clubs’ positions in the league pyramid, making survival subsequent to promotion increasingly difficult to achieve.

Mirroring UEFA’s new cost controls would significantly improve the financial health of Championship clubs. It would make clubs less reliant on funding from owners and, more importantly, reduce the threat of clubs going out of business that is increasingly prevalent today.

But the solution to those problems would worsen another already afflicting English football. Without similar cost controls applied to the Premier League, the gap between the top two divisions would only widen. Championship clubs would risk remaining moored there for good, with a glass ceiling thickened rather than shattered. Cost controls in the second tier are necessary, but English football needs even wider change to cure its financial ills.