This webinar constituted the second joint event as a collaboration between the Center for Sports & Business at the Stockholm School of Economics and the Spanish Football League LaLiga. On March 22, we jointly organized the event Celebrating Football for All - Finding a Joint Way Forward for the Development of European Football, which, among others, featured LaLiga President Javier Tebas. 

Introduction

Center Director Martin Carlsson-Wall begun with highlighting one of the critical issues in sports; one the one hand, sports is an industry with profitability, innovation and digitalization. On the other hand, sports is also something more, it can be seen as a religion, and in that sense, it is more passionate, which highlights the complexities of this industry. 

Through combining the research and the practical frontier, this webinar aimed at discussing the challenges of how you come to terms with financial regulation when sports is both a product and a religion. 

Juan Fuentes Fernández, Delegate of LaLiga to the Nordic countries, pointed towards the importance of the intersection between industry and academia, which these forums and collaborations are a great example of. 

The Research Frontier

Tomas Hjelström, Assistant Professor at the Department of Accounting at the Stockholm School of Economics, started to present the research frontier on the topic of financial regulation. 

Why Regulation?

Financial regulation is about evening the playing field, i.e. operating on the same general conditions and ensuring no foul play is taking place. As a result of that, a couple of other things emerge. Firstly, predictability (i.e. what we can expect from the future given the information provided from a financial point of view) is key for why we need regulation to make sure we can predict. Secondly, this also relates to trust, both concerning trust between organizations, internally, and for capital providers. Lastly, we need financial regulation to prevent any potential wrongful behavior.

Who Regulates Whom? - Levels for “Whom”

Next, it is needed to elaborate what kind of levels need to be regulated. Should we only regulate on an international level, or should we go into the different countries and divisions? 

Generally speaking, we have several levels of regulation with varying degrees of complexity, considering, for instance, from a capital markets perspective, thr International Financial Reporting Standards, as well as adaptations of these to SMEs and local versions, which tend to be more modest in complexity. 

Looking at who is going to formulate the regulation, one can think about this in terms of geographical scope and/or sources of competence. Geographical scope comprises of: Global Free (covering all geographical areas with the same regulation with one organization providing the regulation), Global - Local Endorsed (global set of standards but locally endorsed) and Local (country by country provide the regulation). Sources of competence provide different approaches: complete self-regulation (sports organizations set the regulation and develop what they are going to do), professional outsiders (particular competence within the regulation, being the starting point for developing the regulatory setting), or governmental. 

However, what is important is that a mix of industry knowledge (i.e. football) combined with a strong understanding of financial regulation and reporting, in particular. 

How to Regulate?

Regarding the question of how to regulate, one can be very detailed, focusing on clear rules of various kinds (rules-based regulation). However, this tends to trigger different evasive actions to make sure the underlying actions are represented in a way one wants rather than the intended approach for it. The other alternative is to have a more overall principles-based set of regulation with a more vague definition of things that are put forward. The problem with this is, however, that it requires a lot of professional judgement, most importantly for the clubs that are going to report according to this framework and enforcement agencies that have to oversee it. Thus, the balance between rules-based and principles-based regulation is an important consideration. 

Enforcement - The Key

Research is clear about that the regulation that is in place must be enforceable and enforcers must have the formal and informal power to act and do it rapidly. There needs to be a legal underpinning making sure whatever rules and breaking of these rules that one might see is being enforced forcefully and rapidly, requiring quick and reliable processes for following up on any kind of deviations. In this context, there is a need for another level of competence, most importantly reliable sources that drive the enforcement, and, thus, external and independent sources become key.

Conclusions

To conclude, the area of financial regulation is much about building trust in many dimensions - between the overarching organizations, between clubs that are playing on a fair and even playfield, but also between the companies and individuals investing in these organizations. Key is to build hierarchies and align those hierarchies in a good way to ensure understanding and local and international acceptance for the regulatory structure. 

Further, the use of sources of competences is built on the fact that you have a strong reputation and credibility both in the area of the particular part we are regulating (i.e. sports), but to a very large extent with respect to regulation in its own right. These sources include academia, area professionals and, in all of this, independence is key.

The interaction between regulation and enforcement is critical to a successful structure that will help sports in general to survive, be credible and ensure fair play.

The Practical Frontier

Next, Javier Gómez, Chief Corporate Officer at LaLiga, offered a practical example of the issue of financial regulation at LaLiga. Gómez put into context where LaLiga is, where they were in the past, why they did what they did and why the clubs did decide to go along this path. 

In 2012, 23 of the 42 Spanish League clubs of the first and second division were defaulting. Clubs owed players money on a daily basis and had significant official claims at the end of the season for not being paid. 

Consequently, the Spanish government was looking into professional football and ready to intervene unless something was done about the situation. The Spanish football clubs decided to approve an economic control system, which was different to the one applied in Europe, in October 2012, with the intention of changing this unsustainable situation.

The Economic Control System in LaLiga

The objective of the economic control system is to establish the sports squad cost that this year's squad can have the following year. Every year, each football club is assigned a sports squad cost, i.e. the maximum amount that they can spend on their sports squad. If the clubs are not fulfilling the sports squad cost, LaLiga will not authorize players for registration to be able to play. 

The regulation is clear regarding what the clubs should put in the budget for revenue, expenses, investments/divestments, and financing. If the revenue is X amount next season and expenses Y amount, the difference between the revenue and the expenses is the sports squad cost that the clubs will be able to have for the next season. 

Principle of Financial Sense

According to Gómez, LaLiga applies the principle of financial sense. For instance, if a club has commercial revenue and a contract that supports that for a million Euros, LaLiga is able to send that contract to an independent person to assess whether or not that contract is actually valued at market value. Regarding player contracts, the independent body will also assess whether or not the contract has salaries in line with market values. Thus, the independent bodies are able to say what would be the amount that really can be put in the expenses for that player, which is then included in the sports squad limit. 

Moreover, UEFA allows capital injections to the clubs from shareholders, but LaLiga sets rules that require the division of this capital that is injected over the period of four years (average duration of a player's contract), meaning that only 25% of this capital injection can be put on the Profit or Loss statement. 

The economic control system goes hand in hand with a sanction system. In case the football clubs at any point in time do not tell LaLiga the truth, they are sanctioned for that. Sanctions can range from fines, not being allowed to register players for a year, to being expelled from the competition. 

Results of the System

According to Javier Gómez, the implementation of the economic control system resulted in overall positive effects in every single club of LaLiga, taking into account the period up until the COVID-19 pandemic. During the pandemic, there were no breaches for payment and no default on payments due to having savings that have been accummulated during the years that the new regulation was implemented. 

More longer-term effects have been an increase in credibility and trust. This in turn has effects on the trust outside investors put in LaLiga, knowing that the league has implemented financial regulation that is being fulfilled by all football clubs. 

To conclude, according to Javier Gómez, the economic control system mirrors LaLiga's focus on sustainability, maintaining a long-term existence of the clubs, considering their importance for society, and LaLiga's opposition against models which allow for big losses every single year by the clubs, effecting the whole ecosystem of football.