What you need to know about commercial regulation - in the sports sector and elsewhere

There is compliance and there is "compliance"

Imagine you are a business person faced with an irksome or onerous regulation.

The regulation means that a course of action you would like to take for your business may not be available.

What do you do?

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1. Breach

You can breach the regulation.

But if you breach the regulation then that can have adverse consequences for your business and even potentially for you.

In practice, this will depend on the nature of the regulation, the likelihood of detection and investigation, the likelihood of sanction, the seriousness of the sanction, and whether the sanction can be shrugged off as a “cost of business”.

A decision to breach a regulation can be be framed in terms of “taking a view” (this is an infamous phrase, as I set out in this 2022 post) - and obliging lawyers may use phrases like “this may upset the regulators” or “this may attract criticism”.

But whichever way it is dressed up, it is still a decision to take the risk of being found in breach of a regulation.

No sensible business would want to be found in breach of a regulation: it has knock on effects, especially if that business is seeking to attract investors, purchasers or to have good relations with companies that care about due diligence. It also risks adverse publicity.

So what else?

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2. Challenge

You can challenge the regulation in court, usually be means of an application for judicial review.

This, however, is not common - for various reasons.

First, it is often not wise to upset your regulator.

Second, you may lose in court and even find the regulation is fortified by (for you, unhelpful) judicial comments.

Third, you may win in court and find that the regulator just makes the same regulation again but with better legal advice so as to render it challenge-proof.

Fourth, you are also unlikely to get damages if you win in court and you may not even recover your legal costs. (And those who say “it is not the money, it is a matter of principle” invariably do not still say so after the first lawyers’ bill.)

In practice, commercial judicial review is often the last resort, where the commercial consequences of not challenging a regulation outweigh any other option. Or commercial judicial review can be used in a strategic way so as to they and shape the activity of your regulator.

But, in practice, few regulated companies are in a position to fund and mount a court challenge to a regulation, even if they they would like to do so.

So what else?

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3. “Compliance”

You can comply - or “comply” - with the regulation.

If you comply with a regulation then you lessen - and you hope eliminate - the risk of any sanction. You also do not need to fund any futile court challenge.

But there is compliance and there is “compliance”.

Here we nod towards a classic 1947 book by Stephen Potter: The Theory and Practice of Gamesmanship, or the Art of Winning Games without Actually Cheating:

And so, in practice, this is what most sensible regulated entities do when faced with an irksome or onerous regulation: they find a way of complying with it, either to their advantage or at least reducing the disadvantage.

It is akin to that old chestnut of a distinction between “tax avoidance” and “tax evasion”.

(The difference often being the quality of the advice.)

This is because regulation generally is not magic, and particular regulations are not spells. An undesirable activity cannot be extinguished just by typing out a law against it, any more than it can be banished by pointing a wand at it and reciting some cod-Latin.

Yes, there is often the call that “something should be done” and that there be “crackdowns” and so on.

But good and effective regulation is not easy, and not only does a regulator need to have the wit and the resources to enforce the regulation against breaches; the regulation itself needs to be crafted so as to limit creative “compliance” and also so as to avoid undesirable knock-on effects.

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There is a fourth, longer-term approach, which is to engage with your regulator so as to avoid irksome and onerous regulations in future.

This is called “regulatory capture” - and it is what will tend to happen in any regulated commercial sector over time, despite the good intentions of those who set up the regulatory regime.

But in the shorter-term, creative “compliance” is often the preferred course. And if done in a smart way, there is little or nothing that can be done.

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And now we come to football.

If you think about it, it should not be any great surprise that those that make money out of games are particularly good at gaming a system.

Just as a team can develop a style of play that benefits from whatever offside rule is in force that season, and thereby benefits more often than not from VAR, then a football club as a commercial organisation can work out how to work within a given system to its commercial advantage (or at least to minimise disadvantages).

(Yes, I am an Aston Villa fan.)

The current regulations about profit and sustainability (PSR) are based, like many regulatory regimes, on good intentions.

But if good intentions were always enough, there would be no need for regulations.

That transactions between football clubs now are carefully - somewhat artificially - structured so as to comply with this PSR regime should not be a shock. Indeed, it would be shock if this was not the case.

But it is less clear what any of this now has to do with sustainability - other than perhaps to sustain certain privileged clubs in their privileged positions.

(Yes, again I am an Aston Villa fan.)

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All because, as with football, there needs to be some rules in place in respect of how clubs operate as commercial entities.

But there is a distinction between formulating a rule and achieving the desired regulatory outcome.

From time to time, there will be breaches and perhaps challenges, but the real problem will be when the issue becomes “compliance”.

That is, of course, until the unhappy regulated entities are able to change the rules of the game.