Birmingham City F.C. – Avoiding the Relegation Blues?

Splashing Cash Post-Relegation

Following Birmingham City’s relegation from the Championship to League One, at the end of the 2023/2024 season, the club’s CEO, Garry Cook stated: “The comeback is always better than the setback.”[1]

Since Cook’s statement, Birmingham City, backed by US-based investment firm, Knighthead, and seven-time Super Bowl winner, Tom Brady, have invested substantially in recent months in the pursuit of a return to the Championship (and perhaps even further to the Premier League); reportedly investing £15 million to upgrade the stadium and training ground, and spending between £20 million and £25 million on player acquisitions during the 2024 summer transfer window. Notable signings included Jay Stansfield from Fulham F.C., for an estimated £15 million, which tripled the League One transfer record in an astonishing move.

Some have queried how Birmingham City have been able to afford such significant financial outlays given:

1. the salary cost-capping rules in League One, otherwise known as the Salary Cost Management Protocols (“SCMP”). These are designed to promote financial sustainability by limiting wage expenditure to a percentage of a club’s turnover; and
2. the club’s relegation to League One. Historically, relegated teams have tightened their purse strings after relegation and, like the wider English Football League (“EFL”), most teams in the division operate at a financial loss.

SCMP

SCMP prohibits Player Related Expenditure in any financial year of a club in League One from exceeding the sum of:

1. 60% of Relevant Turnover (which includes, amongst other things, Premier League solidarity payments, match revenue and commercial net income);[2] plus
2. 100% of Football Fortune Income (which includes, amongst other things, cash and non-redeemable equity injections from owners).[3]

However, as a newly relegated club from the Championship, the permitted threshold for Birmingham City, is increased to 75% of Relevant Turnover in the first season the club is relegated.[4] Football Fortune Income remains at 100%.

Permitting non-redeemable equity injections by owners to count as eligible revenue may seem odd.  To the extent such injections are intended to cover losses of a club, SCMP would seem to be rewarding loss-making clubs and reinforcing the financial dependency of club owners (which itself has been a problem for certain EFL clubs historically). It would also seem to be inviting wealthy owners, such as Knighthead, the opportunity to buy their way out of the lower leagues, which undermines the idea of competitive balance.

The Profitability and Sustainability Rules (the “PSR”)

Conversely, the PSR, applicable to Championship clubs (and Premier League clubs, albeit it with certain differences), limits the aggregate amount of losses a club can suffer over three rolling financial years.[5]

There are two relevant loss thresholds: (i) a lower loss threshold of £15m; and (ii) an upper loss threshold of £39m (unless the club in question has spent any time in the Premier League in the relevant period, in which case the threshold may be higher).

Broadly, where the aggregate losses:

1. do no exceed the lower loss threshold, the club is fine, provided that it is likely to remain solvent, pay its creditors, etc., in the following season;
2. exceed the lower loss threshold, but do not exceed the upper loss threshold, the club is fine, provided that it gives additional financial information to the EFL, and the owners provide Secured Funding to cover the losses (e.g., non-redeemable equity, irrevocable commitments backed by guarantees, etc., but not a loan); or
3. exceeds the upper loss threshold (without any permissible mitigating factors), the club is in breach and the EFL can impose certain sanctions.

To Comply or Gamble?

Given that clubs outside of the Premier League and the Championship are not presently subject to both expenditure and loss restrictions (although the Premier League is trialling, on a non-binding basis, a new system for expenditure and anchoring)[6], clubs can, at least in theory, seek to utilise the rules to their advantage.

However, we query whether, in so doing, this might become a PSR ticking timebomb for a club, especially if that club spends excessively in any one or more seasons, when it is trying to achieve promotion to the Championship and/or when it is in the Championship and trying to achieve promotion to the Premier League.

Where a club in League One wins promotion to the Championship, it then becomes subject to the PSR.  Any excessive losses that were covered by owners in the pursuit of promotion, and which were treated as eligible revenue under the SCMP, revert to losses under the PSR. Unless that club achieves back-to-back promotion to the Premier League (which, although Ipswich Town impressively managed recently, is itself a rare feat), it will more than likely be running the risk of breaching the PSR, especially if it continues to spend excessively whilst in the Championship, perhaps in an effort to compete with those clubs still in receipt of (arguably, unfair and competitively distorting) parachute payments from the Premier League.

While Birmingham City might be viewed to be spending heavily, prior to being subject to the PSR, they are, on the face of it, complying with the rules (SCMP), and it is the rules which are (guilty of) facilitating and incentivising such behaviour. It should be noted, though, that Birmingham City is not simply spending money. It is also seeking to increase its revenue – e.g., through the stadium naming rights deal with Knighthead, and new commercial partnerships with global airline Delta and American sportswear brand UNDEFEATED.

Will others outside of the Premier League and the Championship be considering the same? Possibly.  Some of the owners already have the requisite wealth; and international investors, including US-based investors, continue to look at clubs at this level, with a view to achieving promotion in short order (e.g., Tranmere Rovers is widely reported to be the subject of a proposed takeover by a consortium led by American Joe Tacopina, a former lawyer of Donald Trump).

Interestingly, in the Football Sustainability Report 2024, authored by Lane Clark & Peacock LLP[7], significant losses of League One clubs are noted: losses have increased by 70% in the last 12 months.[8] Is there already a correlation between this finding and the fact that the Financial Fair Play rules for League One are SCMP and not the PSR?

The Independent Football Regulator (“IFR”)

Lastly, a note on the IFR and Financial Fair Play.

The Football Governance Bill (the “Bill”) was included in the King’s Speech in July 2024[9]. It is rumoured that Labour could be reintroducing it to Parliament before the end of the 2024, although it is unclear the extent of any changes which Labour will be making to the Bill and whether it will be introduced in the House of Commons or the House of Lords.

We had previously reported on the Bill introduced to Parliament by the previous Conservative government: please click here.

Given the wide support the Bill continues to enjoy in Parliament, it is highly likely that the Bill will become law at some point.

One thing that should be clarified in the new Bill is Financial Fair Play. Prior to the 2024 general election, it had been understood that the IFR would not be regulating Financial Fair Play, as this was thought by the government and the leagues to be a footballing matter and, therefore, solely within the regulatory purview of the leagues. We would, however, suggest that this is an overly simplistic view on all sides.  If the IFR is tasked with ensuring the financial sustainability of clubs, with the ability to impose conditions relating to debt management, liquidity requirements and/or overall cost reduction, it could, logically, have a bearing on the same financial elements covered by the Financial Fair Play rules. This should be recognised by the new Bill and the IFR, and the leagues should probably be mandated to work together, even if the remit of footballing consequences (e.g., points deductions) are to remain solely with the leagues. We acknowledge, though, that this will also need to be carefully balanced against the overarching requirement that football must be free from political interference.[10]

This article was authored by Christopher Allen, Partner, Andy Hughes, Solicitor, James Bateman and Trainee Solicitor, Jack Rudgeley.

[1] https://www.telegraph.co.uk/football/2024/08/05/birmingham-city-fc-recruitment-spending-league-one-reset/

[2] For League Two clubs it is 50% of Relevant Turnover

[3] EFL Handbook 2024/25, The Salary Cost Management Protocols, Section Six, Appendix 5, Annex 3, Part 2, paragraph 1.2 and Appendices A (paragraph 2) and B

[4] Ibid, paragraph 12

[5] EFL Handbook 2024/25, Championship Profitability and Sustainability Rules, Appendix 5, Part 1

[6] https://www.beinsports.com/en-us/soccer/premier-league/articles/premier-league-clubs-agree-to-new-financial-rules-to-replace-psr-2024-06-06

[7] LCP Football Sustainability Report 2024

[8] Ibid, page 5

[9] https://www.gov.uk/government/speeches/the-kings-speech-2024

[10] e.g., FIFA Statutes, Article 15(c)