Dragging football fans’ eyes away from a game is difficult. But for Everton, a club in the English Premier League, the season’s most critical moments have been two rulings by panels of lawyers: the first in November, docking the club ten points for breaching the league’s financial rules; the second on February 26th, reducing the penalty on appeal to six points.

Everton is the first top-flight English club to be punished under the regulations, which are called Profit and Sustainability Rules (PSR) by the Premier League and Financial Fair Play (FFP) or Financial Sustainability by UEFA, the sport’s administrative body in Europe. More sanctions may come, against Manchester City, the champions, and Nottingham Forest; Everton itself could face more trouble.

Under PSR, which was introduced in 2013, a club cannot lose more than £105m ($133m) over three years, excluding certain categories like stadium investments, women’s football and community projects. Similar rules were originally introduced in England’s lower divisions after a spate of bankruptcies in the 2000s. Their stated objective is admirable: preventing clubs from going bust by overspending to chase sporting glory. Insolvencies in English football have dropped since the 2000s. But there is a cost: the rules favour richer incumbents and constrain challengers.

Everton’s story follows a familiar pattern in English football. A deep-pocketed owner—Farhad Moshiri, a British-Iranian billionaire—bought the club in 2016, planning to spend big and reach the top of English football. He managed only the first: Everton’s wage bill doubled between 2016 and 2021. But Everton barely escaped relegation in the 2021-22 and 2022-23 seasons. The club’s business plan had relied on regular top-eight finishes for profitability.

Ballooning costs and weak revenues drove a £287m pre-tax loss in the latest PSR evaluation period. The club submitted a heroically creative set of carve-outs to reach the allowable £105m, some highly unconventional (not suing a player charged with sex offences for damages, issues selling players because of the pandemic). Eventually, Everton conceded it had overspent while arguing that the war in Ukraine (sanctions caused stadium-naming rights to fall through) and the pandemic mitigated the breach. The initial penalty brought relegation closer, further destabilising the club.

UEFA has made some changes to its rules, to focus on “squad cost ratio”, the bill for players and top coaches relative to revenues. The Premier League is expected to follow suit. This is an improvement: it is simpler and also implicitly inflation-indexed. The £105m allowable loss hadn’t risen either with economy-wide inflation or with exploding footballers’ wages.

But a core trade-off remains: stability versus competition. By capping spending relative to club revenues, the rules limit the ways in which challengers can outmuscle richer incumbents. As a result an expensive but once-viable path to success has been closed off. Manchester City lost money for eight consecutive seasons between 2007 and 2014, before posting eight seasons of pre-tax profit from 2015 during which it won the league five times. Academics at Sheffield Hallam University have found that competitive balance deteriorated across the five largest European leagues after the introduction of FFP (see chart). Across all top divisions in Europe the number of different top-four finishers declined by 10%. (This is circumstantial evidence; football has changed a lot in that time.)

Advocates for the rules emphasise the devastation for fans when clubs go bust. Bury FC, a stalwart of English football’s third and fourth tiers, collapsed in 2019 and now languishes in the ninth tier, even after a fan-funded rescue. But most insolvencies are more benign. Stefan Szymanski, a sports economist at the University of Michigan, has compiled data on every bankruptcy in the top four divisions since 1945 and found no club that had vanished entirely. England’s football clubs are remarkable examples of corporate longevity. “It’s hard to imagine any other industry where there were 100 businesses a century ago and they’re all still around,” he says.

Fans tend to be highly supportive of regulation, however. So too is the government, which is legislating for an independent football regulator to address “systemic financial issues in football”. It must resist the temptation to meddle further. English football is watched worldwide because of its fierce competitiveness. The industry has a spectacular knack of emptying billionaires’ pockets and sprinkling a share of the riches across English towns. Cinderella stories, of the sort Mr Moshiri hoped for with Everton, may not always materialise. But they should be possible.  ■

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