Squad Cost Ratio & Anchoring – The Premier League's new financial rules explained
Acronyms such as FFP (Financial Fair Play) and PSR (Profit and Sustainability Rules) have become part of the footballing furniture in recent years, but now a new set of terms is looming on the horizon.
The PSR era is expected to close at the end of next season, which will see the introduction of 'Squad Cost Ratio', or 'SCR', and 'Anchoring' in its place.
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On the latest episode of The Athletic FC Podcast, Ayo Akinwolere was joined by The Athletic's Matt Slater and Jacob Whitehead to explain what both new terms mean and how they aim to govern financial regulation in the Premier League.
A partial transcript has been edited for clarity and length. The full episode is available on YouTube below or in 'The Athletic FC Podcast' feed on Apple Podcasts and Spotify.
Ayo: Premier League clubs met in London last Thursday and agreed that they're not ready for the new Squad Cost Ratio rules to come in. So that means PSR remains for now. Firstly, Matt, let's just debunk what this Squad Cost Ratio is. And secondly, tell us why clubs came to such a conclusion.
Matt: Yeah, the much loved PSR survives. Let's start with Squad Cost then. We've been talking about it and people would have heard about it over the last year or so, perhaps even longer if they've been following UEFA. So UEFA started this a few years ago and it's up and running. The way the Squad Cost rule works is it's basically a soft (salary) cap. It's an attempt to connect the spending that any club makes to the products on the pitch. So your first team squad, your players, your coaches and any money you spend on assembling that group. What counts is wages — players and first-team staff — and the amortised transfer spend. We've talked about amortisation, that's just how you account for transfer spend. You basically spread your transfer fee over the length of the player's contract. It's an annual cost; very simply, a £100million transfer over five years is £20million per year. So it's wages, amortised cost of transfers and any fees you spend on agents. That's your Squad Cost.
Then, the Ratio bit is your turnover and UEFA have introduced it in stages. In year one, it was 90 per cent, in year two, it was 80 per cent, and this season, we're at 70 per cent, and that's where they want to get to. If you think about it, it's a nice, healthy and sustainable number. It's a very old-fashioned idea that about 70 per cent of a business' costs should go on wages and the cost of doing business. So that's where UEFA are at. The Premier League, as they did a decade ago with Financial Fair Play, want to make it a little bit more liberal than that. They want to give clubs that don't play in UEFA competitions and don't have that additional revenue that has created gaps and chasms all across Europe leeway to go up to 85%. And nearly everyone, because UEFA have gone their first, thinks, 'Well we should all be aligned just as we were all aligned when UEFA started this journey a decade ago with Financial Fair Play'. So there's that.
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Our teams that play in Europe are already under this UEFA system. There's also the fact that people are fed up with PSR, which was just the Premier League's version of Financial Fair Play. They're fed up with the loss threshold (where clubs cannot post losses of more than £105million over a three-year period). We've spent the last year or 18 months seeing Premier League clubs actually breach this rule, so they want to try something else. Most people believe that Squad Cost is a bit looser and the direction of travel was, 'We're going to do it next season'. However, this is no longer the case. The reasons, which I'm sure we're going to spend a lot more time talking about, in no particular order are the fact the Professional Football Association (PFA) don't like bits of it. The Premier League has been tied up in legal lawfare with Manchester City and other bits of its Financial Fair Play regime (PSR) are under attack. So there are lots of reasons why they're just not ready. But anyway, Squad Cost is happening in Europe and the Premier League says there's unanimous support for it, and I think that's probably true among the clubs. I suspect we'll get there, but it's just going to be another 18 months or so away.
Ayo: Let's get into what other rules we could see in the post-PSR world. One of them is 'Anchoring', which might be a new word to the listeners. This essentially limits the club's spending on player costs to five times the amount that the team who finishes bottom of the league receives in prize money and TV revenue. Not complicated at all. Matt, give us a brief explainer and also who's in opposition to it as well?
Matt: It's an attempt to sort of tweak and tinker around the edge. We have a situation where the big clubs can be big and then we're going to do Squad Cost. But then what is a possible consequence of Squad Cost? Well, it's a really obvious one. If you're tying how much you can spend on your first team to revenue, it massively helps the big clubs. They're already big, they've all got big stadiums and they play in Europe, so they have access to UEFA money. That's extra home games and that's more international sponsors. So they have all these advantages and it just makes them big. The Deloitte Money League list, which was only published last month, hasn't really changed. You can just see the gaps and there are tiers within that.
What do we do about this competitive balance issue? Anchoring is an attempt to address that. It's very subtle and it probably isn't going to change that much. But it is, by implication, a hard (salary) cap. Anchoring is something that would run in tandem with Squad Cost and it would say that 'You can only spend a maximum of five times the hard cap regardless of how much money you're earning and regardless of where your Ratio is'. There is a hard ceiling and it's five times the amount that the worst team gets in central income from the Premier League. If we look at the table, everyone knows it goes one to 20 and they share the Premier League media rights and the central sponsorship money.
The top team gets 1.8 times the amount as the bottom team. Let's just say because it's easy maths, the bottom team gets £100million and the top teams get about £180million. That's made up of the prize money, which is£3 million to £4million per place. You get facility fees, which is every time you're on TV, and every club is on TV for a minimum amount of time. But of course, the big clubs are on more often because they are the big clubs and they're usually going for the title. So that's where you get the 1.8 to 1 — this is the problem. Now, it's got even more complicated because you could say, 'Well hold on a minute. I get you don't like this, but what's the problem with Squad Cost?'. Because the PFA have threatened the Premier League saying, 'Don't do any of these things. We're still consulting and we're still talking about it. Isn't Squad Cost OK? They're already doing it with UEFA'. So what the PFA are saying is the Premier League aren't really being straight with all of us because they know the only way they are going to get Squad Cost through with those mid-tier, middle-class clubs, is if Anchoring comes in as well because Anchoring is the break. Anchoring is the competitive measure and the competitive balance measure. If you're West Ham, Everton, Brighton or Brentford, for example, you want both. Otherwise, your Man Citys, your Chelseas, your Liverpools and Man Uniteds eventually are unrestrained. We need something alongside Squad Cost. So the two are together, that's the issue.
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Ayo: It feels like a democratisation of sorts in terms of allowing fair competition Jacob. But given the high TV revenues nowadays, do you think it's likely that Anchoring will severely hamper the financial power of the big clubs to stop them from accelerating?
Jacob: Last season, no team would have actually broken it, but Man City and Chelsea were very close. I would say it would be unlikely that it absolutely or massively restrains them from what they're doing now. But it stops them from going into that next stratospheric level. It helps you avoid a situation like you have in Scotland or Spain, where you see much more of a duopoly effectively. It's much more likely to have some element of competitive balance, even if that competitive balance is between six or seven clubs rather than the whole league.
Ayo: So in theory, the shape of the 'Big Six' could look very different in four or five years?
Jacob: In theory, yes, but everything has to go very right for the chasing pack. They need to maximise everything still.
You can listen to full episodes of The Athletic FC Podcast for free on Apple Podcasts and Spotify, and watch on YouTube.
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