Digging deep into Rugby Union’s salary cap: Lord Myner’s Review and the future

2020 has been a tumultuous year for professional sport and in particular for Rugby Union. Earlier this year, Premiership Rugby’s (“PRL”) salary cap regulations (the “Regulations”) received unprecedented scrutiny as 5 times premiership winners Saracens were automatically relegated as result of salary cap breaches. Lord Dyson’s report - detailing the decision made by PRL’s Disciplinary Panel – was subsequently released and (i) examined the role and purpose of the salary cap; (ii) assessed its relationship with competition law; and (iii) mused as to how these Regulations may evolve as Rugby Union adapts to professionalism - see here.

However, since January, the scene has shifted again with two main catalysts: (i) the release of the Lord Myner’s salary cap review (the recommendations of which have been accepted by PRL); and (ii) the Covid-19 pandemic. The up-shot being that the Regulations are again under the spotlight. Accordingly, an update as to where we now stand is timely.

Lord Myner’s Review (the “Review”)

Lord Myner’s comprehensive 55-page review included 52 official recommendations. These recommendations included:

• Greater sanctions for clubs in breach, including relegations, suspension, stripping of titles, and return of prize money;
• Greater accountability for players and agents, and sanctions for both players and agents in breach of their obligations; and
• Greater accountability for club officials, and the introduction of a "fit and proper" test for club owners.

However, perhaps the two most significant features of the Review relate to the recommendations aimed at (i) increasing transparency; and (ii) clarifying the definition of “salary”.

Increased Transparency

Restoration of confidence in the Regulations was a key theme of the Review. Lord Myner emphasised the need for greater transparency from the PRL clubs, which is intrinsically linked to improvements in both PRL and the clubs’ corporate governance processes. Examples of how clubs and the PRL might achieve this increased transparency include:

• Publishing disciplinary decisions in full, with the redaction of confidential information or personal data (R 2.2);
• Include details of all breaches and sanctions in a comprehensive Salary Cap Manager (“SCM”) annual report, which is made public (R 2.3); and
• Publish (i) guidance from the SCM regularly; and (ii) any changes to the regulation - and make this publicly available (R 2.4 & 6).

The hope from the above recommendations is that publicising disciplinary decisions will (a) act as a strong deterrent; and (b) afford clubs the opportunity to reflect on their own processes in the light of another club’s breach.

A further set of recommendations are centred on increasing the powers of the SCM. For example:

• Allowing central access to each club’s salary cap spreadsheet at all times (R 7.1);
• Requiring clubs to provide copies of documents such as new contracts to the SCM within 14 days (reduced from 28 days) (R 7.2);
• Clarifying the power of the SCM to attend clubs without notice and require clubs to provide him with finance reports and access to management accounts (R 7.3); and
• Allow the SCM to make requests to see players’ tax returns on a random basis (R 7.4).

Similarly, there are to be extended powers to auditors - which include:

• Enhancing the powers available to the auditors in their annual audit to include mandatory interviews, sampling of tax returns and more extensive provision of information and documents by the clubs (R 7.6);
• Introducing sanctions for clubs and players that (i) do not comply with reasonable requests from auditors within a reasonable timeframe; and (ii) are found to have deleted evidence post the notification on an investigatory audit (R 7.7 & 14); and
• Random mini investigatory audits for two clubs every year (R 7.12 - 7.15).

These recommendations represent a necessary shift to increasing both the access to and visibility of the clubs’ financial data. This should act as a significant deterrent for clubs intent on finding loopholes under the Regulations.

However, as with all aspects of this topic, nothing is straightforward. Myner acknowledges the additional expenditure on the PRL as a result of this increased scrutiny. Any financial concern is now further magnified due to Covid-19.

Furthermore, Myner’s analysis of the role of the SCM also highlighted that currently (in the event of a suspected salary cap breach) there is no separation between (i) the investigatory powers; and (ii) the prosecution. Currently both these roles are fulfilled by the SCM, and Myner expressed a concern that such centralisation could “facilitate intimidation or manipulation”. To overcome this conflict, Lord Myner’s suggested the introduction of an independent cap governance monitor (“IGCM”) who would have responsibility for (amongst other things) (a) deciding when to initiate a disciplinary process; and (b) overseeing any settlement agreements. The ICGM, ideally, would have “background in law at a senior level and, ideally, an interest in sport in general.”

Definition of Salary

At the heart of the Saracens controversy was a lack of clarity over the definition of “salary”. Lord Myner noted:

“if the regulations are silent about a type of arrangement, then there is an assumption that a payment will be allowed and will not be included in the cap, no matter how closely it might resemble salary.”

His Review recommended that this assumption be reversed via the following recommendations:

• All permitted payments to players should be automatically included within the salary cap, except for a few clearly communicated exceptions (all exceptional items to be pre-approved by the SCM, otherwise they will be automatically treated as salary) (R 3.2 & 3.3); and
• Prohibition of payments that are subjective, extend beyond a player’s playing career or come from connected parties (including sponsorship by connected parties) (R 3.4).

On the one hand, the above recommendations, which propose a pre-approval system by the SCM, should help prevent clubs trying to circumvent the cap. However, prohibiting payments from connected parties to players that are designed to assist with post-career planning (via e.g. co-investments) does raise concerns over player welfare. In defining salary, there is a difficult balance to be found between ensuring players’ salaries are limited to an extent that maintains the competitive balance of the league (and ensuring the financial sustainability of clubs), while simultaneously allowing players the commercial freedom to prepare and set themselves up for life after rugby.

An interesting compromise proposed under the Review allows loans to players – such loans only being permitted if:

(i) the SCM is informed of the arrangement in advance, (ii) the loan is repaid in the same salary cap year, and (iii) it is repaid by way of a deduction from a player’s wages, so the SCM can easily check that it has been repaid. If these requirements are not met, the full amount of the loan should be treated as salary in the salary cap year in which the player received the money.

It is common for elite sports professionals to be quite entrepreneurial with their post-career ambitions. Entrepreneurial ambitions generally require significant cash input early on – so the loan concept will be well received from a player’s perspective. However, it remains to be seen whether clubs/ owners are willing to take this financial/regulatory risk. If a loan is not repaid – noting that most clubs (particularly with the now reduced cap – to be discussed below) are already operating up to the cap - the incorporation of the loan as salary may inadvertently cause a club to exceed the cap.

Marquee Players

The Review again highlights the complexities around “marquee” players. By way of reminder, the Regulations allow two excluded players to be paid salaries that sit outside the cap and thus not subject to any salary limit. On the face of it, this undermines the cap’s aim of ensuring competitive equality since wealthier clubs are able to offer the stars of the game higher wages. The ability for clubs to rotate their players in and out of “marquee” status also opens the cap up to a degree of manipulation. Yet, to remove the “marquee” player concept would (i) lead to significant legal difficulties for clubs with marquee players mid-way through their contracts; and (ii) undoubtedly reduce the premiership’s ability to attract the best players and in turn diminish the overall product. Consequently, Myner stopped short of making any specific recommendations in this respect.

What now and where next?

Regulation v Welfare

To an extent, the implementation of Lord Myner’s recommendations and the scrutiny on the Regulations has taken a back seat because of Covid-19.

Despite this, the total cap has been reduced by £1.4m - from £7m to £5.6m (which still includes £600,000 of academy credits). This reduction was, in part, a reaction to the exponential wage inflation within the league over the last 5 years (in the 2013-14 season 5 premiership players commanded a wage in excess of £300,000 per year - this has increased to 99 players). It is a move with financial stability at the forefront of mind. However, it has also coincided with the majority of top-flight players taking a 25% pay cut to soften the financial impact of the pandemic.

It remains to be seen whether a reduced cap has a detrimental impact on the PRL product generally. Even with the pay cuts alluded to above, it is likely that clubs will need to operate with reduced squads. This has seen high profile players move away from the premiership - British and Irish Lion George Kruis has moved to Japan, while 2018 RPA Players’ player of the year Telusa Veainu has left Leicester for Stade Francais – and will no doubt make recruitment of high quality international players more difficult.

To complicate things further, these changes are being made against the backdrop of a continuing player welfare discussion. Smaller squads will allow for less player rotation and there is already real disgruntlement at the proposed “project restart” fixture list that will require clubs to play two fixtures per week in order to complete this elongated season. PRL could face a player exodus if it does not take such welfare considerations seriously.

Private Equity

Rugby Union (and sport generally) may well now find itself open to increased private equity investment. As a result of Covid-19, rugby finds itself in distress, under-capitalized and in desperate need for significant cash resources. It appears ripe for PE investment. Previously, PE houses may have been deterred by integrity breaches (such as the Saracens’ breach earlier this year) and a lack of corporate governance. But, as shown via Lord Myners’ recommendations, and now compounded by the Covid-19 pandemic – both the clubs and the PRL are (i) adjusting and modernising their attitudes to governance; and (ii) undergoing a significant period of self-reflection regarding the regulatory integrity of their competition. It will make rugby more investible and CVC’s stakes in both the Pro14 and six nations could be a sign of things to come.

It is, though, tough to predict exactly how PE houses will value and understand the role of the salary cap. As noted, Lord Myner’s recommendations are representative of a general emphasis upon financial stability, with the cap updated to reflect this. Private equity investors may well seek to shift this focus to profitability - enhancing the premiership’s product and therefore creating an environment that ensures the world’s best player talent is attracted. On that basis, a number of Myner’s recommendations may be reassessed.

Conclusion

Certainly, Lord Myner’s review has added real clarity over the definition of “salary” within the Regulations and will facilitate a far more transparent investigatory process. This will go a long way to restoring the competition’s integrity. Further, the improvements in corporate governance that the PRL and the clubs will need to implement in order to meet these new regulatory requirements are now (finally) more in line with rugby’s professional status.

However, the future of the Regulations remains impossible to predict. Finding a balance between (i) protecting the clubs’ financial stability; (ii) maintaining a competitive balance; (iii) adhering to player welfare requirements; and (iv) ensuring the retention of player talent – has only been made more difficult by the outbreak of Covid-19. The prospect of significant PE investment may then shift the landscape once more.

We all eagerly await the next chapter in this story…