Well, we’re back here again. Reading have once more been deducted six points, following last season’s penalty of the same value, and now sit just one point off the bottom three in 20th. The looming prospect of relegation just got a whole lot larger.
Last season’s deduction was enforced due to Reading breaching profitability and sustainability (P&S) rules in the four-year period of 2017/18 to 2020/21. With it came a ‘business plan’ agreed between the club and the EFL - harsh medicine to get the club back on track financially. You can find details on all of that here. This season’s deduction has come about due to the Royals breaking the terms of that business plan, thereby triggering a suspended six-point penalty.
This ends a month-long behind-the-scenes saga, although it does of course intensify the pressure on the pitch. It was reported in early March that Reading were facing a points deduction this season, but the following weeks brought no clarity - only confusion as to when the deduction would come into force.
The whole situation is a lot to get your head around - as is typical with this football club. So, to make some sense of it, I’ve tried to summarise everything we currently know: how Reading came to be in breach of the business plan, how the bigger picture looks now, and more.
To do that I’ve worked from a few different sources of information. Reading released their official statement on the deduction here, as well as an open letter from Mark Bowen, while the EFL published their statement, the ‘agreed decision’ between themselves and Reading here, and the decision of the Club Financial Review Panel (CFRP) here.
“What’s the CFRP?” I hear you ask. Well, as the EFL wrote in their statement:
“This is the first time a club in the EFL has been subject to a review by the newly formed independent Club Financial Review Panel (CFRP), chaired by Christopher Quinlan KC, which considers matters put forward by the EFL’s independent Club Financial Reporting Unit (CFRU). The entire process is independent of the EFL board and seeks to ensure EFL clubs’ compliance with relevant financial regulations.”
How did Reading breach the business plan?
Reading’s statement isn’t specific about what happened, instead saying:
“The club accepts that it has not sufficiently satisfied certain elements of the planned budget and that, as a result, the independent Club Financial Review Panel has been unable to ratify that the club has met its forecast for compliance.”
So it’s those “certain elements” that we need to get into.
The issue isn’t with how much Reading have reduced spending, whether relating to wages, transfer fees or anything else. The club stressed in its statement that it has had a “rigid adherence to a strict league-monitored wage structure and transfer embargo”. The EFL didn’t disagree with any of that and there’s no suggestion anywhere that Reading’s cost reduction has been at fault.
The problem actually relates to an inability to bring money into the club. Reading failed to do two things as set out in the business plan:
- Comply with P&S for the four-year period of 2019/20 to 2022/23. This entailed staying below an upper loss threshold of £39m AEBT (adjusted earning before taxes)
- Generate a certain amount of profit from player sales
As Mark Bowen said in his open letter, meeting those terms was “admittedly ambitious, requiring significant player sales income”. In practice, it probably would have relied on Reading getting at least Liam Moore and George Puscas off the books permanently, and perhaps also Lucas Joao and/or Ovie Ejaria, but ultimately only the first two departed, both on temporary stints in January 2022.
Thus, in October 2022, Reading made it clear that they would instead try to raise money by selling an investment held in a related party - referred to as a “proposed transaction” in the CFRP document. The CFRP acknowledged in its decision document that, “upon realising there was limited value in the playing squad, [Reading] attempted to generate profit of a similar nature from an alternative source”.
While details around this “related party” are redacted in the CFRP’s decision, that document did state that:
“It appears that the existence of the [redacted] was not designed to circumvent the P&S rules. The shares in [redacted] have been owned by the club for many years prior to the P&S rules amendment.”
However, the proposed transaction was not completed by March 1 2023, and Reading’s P&S submission accepted that the club would therefore exceed the £39m figure. It’s not clear why the deal wasn’t completed by March 1 2023.
Reading accepted the content of the CFRU’s report on March 24 and came to an ‘agreed decision’, thereby triggering the deduction. This was ratified by the CFRP. They really should get more distinct acronyms, shouldn’t they?
A deduction was seemingly inevitable
Looking at all the available information, it appears that Reading would have had to do a really good job of selling players last summer if a six-point deduction this season were to be avoided. And anyway, I can’t even be confident that getting Moore and Puscas off the books would have done the job. Maybe, maybe not.
So, realistically, although we didn’t know it before March 2023, this points deduction was probably unavoidable all along. The logical line of query then is over Reading’s approach to the agreed business plan in November 2021: did we mess up by over-promising the amount of money we could raise through player sales? Bowen strongly argues no:
“Had the club not agreed that plan, our points punishment last season would have been more severe and - to be clear - would ultimately have led to relegation from the Championship.”
From the available information I’m inclined to agree. It appears that, when we could have otherwise faced a harsher deduction (Derby County were hit with a nine-point deduction for their P&S breach last season), we successfully kicked the can down the road to give us a fighting chance of avoiding relegation in both 2021/22 and 2022/23.
What’s the situation going forwards?
Reading still need to make sure they come in below the £39m loss limit so as to not breach P&S rules, which could result in a points deduction. The club have however been permitted to include the proposed transaction (the sale of the investment) in their P&S submission (covering 2019/20 to 2022/23) as long as it meets a ‘fair market value test’.
Had the proposed transaction been for a tangible asset (ie physical premises, for example a stadium, not that Reading would try to sell its own stadium for P&S purposes), that would not have been permitted for P&S calculations. My understanding of the following extract from the CFRP’s document is that selling an investment is not specifically prohibited under P&S rules:
“This is the only aspect of the proposed agreed decision which we think may prove controversial as it may be that certain other clubs might consider that the sale of such an investment should be excluded under the above rule. However, our view is that, based on the rule as drafted, the sale of an investment does not qualify as a ‘tangible fixed asset’ and, therefore, may be allowed in the calculation.”
It seems as if Reading have found another loophole for helping with P&S.
Yes, but what about transfer restrictions?
In short, Reading will have some restrictions next season but they won’t be anything like as extreme as they have been this season; Bowen discussed at length the practicalities behind signing players in his open letter. Those restrictions have included:
- A total wage bill of £16m
- No transfer fees
- No loan fees
- Agent fees capped at 3%
- Multiple stages of approval for all transfers
Back over to Bowen who explained what the bigger picture is for Reading on the recruitment front going forwards:
“Now we are very confident that this six-point penalty is the last of our medicine and we will now be allowed to come out of the embargo and be able to trade again in the summer. We must still be sensible, we will still be given a budget to stick to, but we will not be governed by the EFL on every decision we make and our every move won’t need to be ratified.
“In simplest terms, they will give us a sensible number and, thanks to all the good work we have done in the last year, we have earned their trust to operate wisely and not exceed that budget. Last summer we had so many different hoops to jump through to be able to get anything done at all. This summer will be different.”
The bottom line...
...is that we need to stay up, obviously. Forget for one moment about how Reading got to this point, the next stage is the most crucial one: remaining in the Championship. It’ll come as scant consolation if we emerge from the business plan as a League One side.
Besides being crucial to our Championship status, the next seven games are also the culmination of a sorry, depressing saga that’s gone on for far too long. Reading have been battling points deductions, a business plan and soft transfer embargoes for years now. And that’s excluding the months without clarity when the club hasn’t known where it’s stood.
It is of course absolutely the club’s fault that those measures were put in place. No one forced Reading to spend recklessly at all, let alone with such scant regard for investing in its long-term future. At the end of the day, the buck stops with the man at the top - the one on whose watch spending spiralled out of control: Dai Yongge.
However, the effect of the EFL’s response has been to grind down a club that’s needed rebuilding, not to be kicked when it’s already down. It’s clear that the EFL haven’t had a coherent idea over the last few years of how to properly treat a club in Reading’s situation. P&S rules are ultimately there to protect clubs, even if that means protecting them from themselves, but the EFL’s harsh medicine has done little to make Reading more profitable or sustainable. Quite the opposite in fact.
Few on any side come out of this episode with any credit. If anyone does it’s the fans who’ve had to put up with all of this, seeing their club hobble along from season to season, so often left in the dark by poor communication on all sides while leaks and media reports fill in some of the blanks before clarity belatedly arrives.
I’m sick of all this, I really am. I’m sick of the anxiety about the long-term state of Reading Football Club, sick of this team being an object of sympathy and derision, sick of putting an asterisk next to any moments I have been able to enjoy.
It does feel as if Reading are getting their act together though. The night is darkest before the dawn and all that. In Mark Bowen I genuinely feel as if we’ve got someone at the helm with the competence, ideas, drive and execution to make this club fit for purpose once more. That process won’t complete overnight and this deduction won’t be the last of our setbacks, but we’ll get there*.