Clubs in the Premier League just voted to amend the rulebook when it comes to financial fair play and PSR, with the introduction of a new system called Squad Cost Ratio (SCR) coming into play next season.
For the last few years, Newcastle United have found themselves stifled by Profit and Sustainability Rules (PSR). Even the massive wealth of PIF has been unable to make a real difference in the grand scheme of things.
That’s largely due to the fact that Newcastle’s revenue is simply not high enough to truly have the financial freedom the club would like. In many ways, it’s left the Magpies trailing their Big Six rivals.
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As part of a regular review of PSR, clubs in the Premier League recently had the chance to alter the rules and usher in a new system, for better or worse.
There was hope this change to PSR could benefit Newcastle in the long run, but the introduction of SCR has us all wondering what the future holds for the Magpies. So, we asked a finance expert to explain it to us.
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Are Newcastle United better off with new Squad Cost Ratio rules?
Geordie Boot Boys spoke exclusively to football finance expert Adam Williams about SCR and asked, simply, will Newcastle United be better off under this new rulebook, or worse?
He said: “With any system of spending controls, it’s going to take some time to see who it benefits and who it restrains. And in reality, it is probably not a binary better-worse case with Newcastle, or indeed any other club in the Premier League.
“But on face value, I think the long-term prospects for Newcastle under SCR look slightly better than under the PSR system because it’s based on revenue, not their bottom line. Although, I will qualify that statement with the fact that, because of the loophole under PSR that you could sell physical assets to yourself and book the profits, clubs who were creative could carve out artificial spending room during the twilight era of PSR anyway.”
Williams went on to say that Newcastle could and should be able to see positive developments because of the new rules, but insisted any chances of truly catching up with the established Big Six are fading fast.
He added: “In terms of it being a revenue-based system, Newcastle have the seventh-highest revenue in the Premier League and, when the new stadium is eventually built, they should separate themselves from the other 13 clubs.
“Bridging the gap between themselves and the Big Six in terms of turnover is, I think, going to be impossible, however. Those clubs simply have much bigger brands internationally, and that lead has been built up over decades. There’s a lot of intangible stuff that goes into that.
“The only other way they are going to be able to earn as much – and therefore spend as much – on a consistent basis is if the Premier League and UEFA change how they distribute money. Where we are at the moment, I don’t see that happening.”
There is one bright note, though, and that’s down to the Newcastle United owners, whose commitment to spending will help push the Magpies as far as they can.
“Where Newcastle do have an advantage is that their owners will, they say, always spend the maximum allowed within the rules,” Williams said. “In the long term, the owners of the Big Six clubs, perhaps with the exception of Manchester City, are in it for a financial return on investment, so they don’t ideally want to be spending as much as possible because that won’t leave them with a very big margin.”
In the wake of the SCR announcement, it was said that Newcastle are right at the limit as things stand, in terms of that 85% spending capability. We know Yasir Al-Rumayyan will stretch that limit as much as possible, but there has to be other solutions.
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What Newcastle United can do to work around new rules
So, what can Newcastle do to push the boundaries and catch up to their rivals? Adam Williams does think the Magpies could pull a few tricks and use some loopholes, particularly when it comes to using St. James’ Park.
He continued: “Returning to the new SCR system, Newcastle could use the fact that it’s a revenue-based system to their advantage. For example, if they host a concert at St James’ Park and they earn, say, £4m but there are also £3m in costs, the net effect for PSR purposes is £1m. But under the SCR system, they are allowed to spend 85% of that £4m on first-team costs.
“I’m sure they will be getting creative with ways to maximise revenue while not necessarily giving too much thought to profit.”
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While there is not thought to be much hope for Newcastle getting into Europe again for next season, the club could well look at UEFA competitions as another way to operate slightly differently under SCR.
Williams added: “There is a pretty significant caveat in that Newcastle hope to be playing in Europe more often than not, so they have to comply with UEFA rules too. The SCR limit in Europe is 70%, so if they are complying with UEFA’s rules already, the 85% cap won’t actually change anything for them.
“UEFA also have a profit-and-loss system similar to PSR too, under which you’re allowed to lose up to around £75m, depending on the exchange rates. So, they still need to consider their bottom line – but then again, UEFA’s punishments are seemingly less severe than the Premier League’s, so Newcastle might treat them more as a luxury tax like we see in some American sports leagues.”
But, one problem Newcastle could encounter is the way that transfers will be monitored through the SCR system.
On that, Williams concluded: “Player sale profits are averaged out over three years under the new Premier League system, so the Alexander Isak sale may not be as impactful as it might have otherwise been under PSR, in the short term at least.
“That is a very, very long-winded way of saying that it’s hard to say whether this is positive or negative with any certainty. It’s nuanced and, just as when PSR was introduced, there are going to be loopholes and workarounds that we haven’t anticipated.
“I do, however, think we can be certain that this isn’t going to eliminate the advantages that the established order already have. Fundamentally, SCR still favours the biggest clubs, just as PSR does.”
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