UEFA Financial Fair Play

Introduction

            Over the last 20 years European soccer has gone through an exciting but dangerous period of global expansion.  When Rupert Murdoch’s Sky TV signed the English Premier League to a $115 million television rights deal in 1992, he set the European club sport on a terror of worldwide expansion.  The Spanish Empire of the 1700s is the only conquest that rivals the expansion of European soccer.[1]  With the additional capital, individual clubs could grow.  More potent, though, was the exposure the clubs garnered worldwide through the advent of technology.  This exposure turned community institutions into global brands that have been wielded with a capitalist’s fist.  The dangerous part is that this expansion has gone unregulated.

In European soccer, regulations are largely non-existent.  Thus it is a utopia for any ambitious owner to attempt to lead their club to the apex of European soccer, the UEFA Champions League.  Many clubs have attempted to attain this goal by building a team full of talent.  Clubs have used modern financial instruments such as leveraged buyouts and excessive amounts of debt.  They have given their plans fancy names such as the “Galacticos Project.”  This sometimes-dangerous process of building a talented team is where regulation is lacking in protecting European club soccer.  In 2009, UEFA did a study of the 655 European soccer clubs and learned that half of them ran a deficit the previous year.[2]   The lack of financial regulation has recently allowed several soccer clubs to go into bankruptcy because they could not pay their creditors.  In response to such occurrences, there is increasing pressure to implement some financial regulations to help protect the solvency of the world’s game.

This post will first investigate how the idea of Financial Fair Play (FFP) was created.  I will examine what some European Leagues already do to curb financial delinquency.  The post will then gloss over concerns skeptics have of the new regulations before delving into how the regulations are structured and how they will be governed.  This will be followed by questions pertaining to how UEFA will be able to achieve their desired goals that FFP is supposed to achieve.  Finally, it will discuss critiques and suggestions meant to improve the current FFP model.

Introduction to FFP

Financial Fair Play is the brainchild of UEFA president Michel Platini.  Mr. Platini did an October 2009 interview with the Wall Street Journal just a month after the UEFA Executive committee accepted the idea of Financial Fair Play.  In it he said, “’I was a leader on the field,’ Mr. Platini, 54, … ‘Now, I should be a leader for the game. To me, it is a game — with many, many things attached.  It has to remain a game, or nobody will save it.’”[3]  His goal is to protect the game of soccer and level the playing field so all can compete equally.

Platini admitted to spending extensive time with sports franchises in the United States to learn how they were so successful, for he claimed they weathered the financial crisis in 2008 better than anyone else.[4]  The reason American sports leagues weathered the crisis so well is due to the uniqueness of the leagues.  “The main role of the leagues (MLB, NFL, NBA, and MLS) within this framework is to implement rules aimed at furthering the collective interest of the teams in achieving joint profit maximization.”[5]  At the highest level of each league, the team owners and commissioner work together to succeed together as a league rather than destroy one another.  This is done by strategically placing teams, sharing revenue, and imposing restrictions on labor markets to ensure competiveness.  These are aspects that are innate to American sports ideology but would not work in the free capitalist markets of European sports.

The French and German soccer leagues already have a form of financial governance.   France’s Lige 1 has the Direction Nationale du Controle de Gestion (DNCG) that oversees every club’s financials and has the power to levy appropriate sanctions on clubs that do not protect the financial sustainability of their club.  Germany’s German Football Federation requires each team in the DFB to apply for a license each season that allows them to compete in the league.  The license application is based on the financial solvency of the clubs.  These regulations do not guarantee that every club will be exempt from financial troubles, but they do protect the entire league from spiraling into a debt-funded competition.  These regulations have protected the French and German leagues from the widespread financial follies that have plagued the English Premier League, Spanish La Liga, and Italy’s Seria A.
Financial Fair Play will be based on the DFB policy of issuing licenses to clubs, which will allow them to participate in UEFA sponsored competitions.  The FFP regulations have been set out with six goals in mind.

1. To introduce financial discipline
2. Decrease salary and transfer fee pressure
3. For clubs to compete within their revenues
4. Long term investment in youth academies
5. To protect the long term viability of club football
6. For clubs to settle their liabilities with creditors on a timely basis[6]

The way Financial Fair Play will work is that over a five-year period soccer clubs will be required to slowly balance their books.  The implementation process was expanded to give clubs more time to comply and the 2012-13 season is the first year that introductory regulations will be in place.  The five-year process will ease clubs towards a balanced budget.  So, in theory, at the conclusion of the five-year period they will only be allowed to spend as much as they make.   The hope is to end the frivolous spending that often runs clubs into extreme debt.  The two chambers of the Club Financial Control Body will regulate this process.[7]   The CFCB will have the power to expel clubs from UEFA competitions if individual clubs do not make the appropriate actions to adhere to the new regulations.  Mr. Platini has repeated that FFP is a provision soccer clubs have asked for.

General FFP Concerns

Even though European clubs have asked for additional regulations, this does not mean that FFP has been met with open arms.  The biggest concern for the overall game is that FFP will create a status quo for big clubs.  Clubs will be required to operate within their revenue streams.  This clause protects clubs from over exerting themselves financially.  The flip side is that clubs with large amounts of revenue will be able to maintain their current financial dominance.  FFP inhibits smaller clubs from borrowing to fund future growth, which is normally how businesses grow.

A big component of FFP is prohibiting an owner with deep pockets to personally fund the team’s growth, but with the requirement of a balanced budget this is no longer possible.  The concern is that clever clubs will increase their revenues by signing exceptionally large sponsorship deals, sometimes with a company their owner is closely affiliated with.  Manchester City’s owner Sheikh Mansour is a Deputy Prime Minister of the United Arab Emirates and four of Manchester City’s eight main sponsors are companies owned by the UAE government.  A main job of the CFCB will be to watch for shady accounting practices aimed at avoiding FFP regulations.

Other major concerns are how the actual FFP regulations will take into account the customs and tax policies of each individual league.  For example, the FFP regulations say that each club must audit their books under their own national conditions.  Well, higher taxes in certain countries will have serious ramifications for the amount clubs can reinvest in the club.  It is also very ambiguous about what can be discounted concerning certain charity payments and investments in other parts of the club.  Third party ownership is not covered in FFP and this could lead to a rise in clubs only owning a portion of a player’s rights.  This would keep the club’s initial costs low but force the club to share the future proceeds from the player’s sale with the third party.  The final concern is that some of the larger clubs are investing their excess capital in non-soccer related investments, like housing projects or a Real Madrid resort in the Middle East.  How does the return on this investment play into Financial Fair Play?  Will the bigger clubs be allowed to count their return as revenue and thus have larger budgets to invest in the team?  It is going to be a full time job to make sure that FFP creates an equal playing field from top to bottom, or if it is simply a guise of equality.

FFP Structure

As stated before the goal of financial fair play is to force clubs to operate on a balanced budget or be penalized by UEFA.  What that simply means is that clubs must make more money than they spend.  The tricky part of FFP is discerning what portions of a club’s income and expenses play into this equation.  Article 58-1 of the UEFA Club Licensing and Financial Fair Play Regulations 2012 edition states that relevant income is,

Gate receipts, broadcasting rights, sponsorship and advertising, commercial activities and other operating income, plus either profit on disposal of player registrations or income from disposal of player registrations, excess proceeds on disposal of tangible fixed assets and finance income. It does not include any non-monetary items or certain income from non-football operations. [8]

Article 58-2 follows and states that relevant expenses are,

Cost of sales, employee benefits expenses and other operating expenses, plus either amortisation or costs of acquiring player registrations, finance costs and dividends. It does not include depreciation/impairment of tangible fixed assets, amortisation/impairment of intangible fixed assets (other than player registrations), expenditure on youth development activities, expenditure on community development activities, any other non-monetary items, finance costs directly attributable to the construction of tangible fixed assets, tax expenses or certain expenses from non-football operations.[9]

UEFA has done their due diligence and clearly stated what income and expenses UEFA participants should apply in their financial statements necessary to receive a license.

Once a club has figured out what is relevant income and expenses, the club then submits a financial report stating whether the club finished with a positive balance.  Though it is not as easy as simply finishing in the green.  Article 61 states that there is an acceptable deviation of 5 million Euros.[10]  This number is subject to change for if the equity partner can supply the difference, up to a certain amount, the club is able to pass the solvency test.  As stated earlier, FFP is in a 5-year implementation process.  This process is directly felt in Article 61 because in 2013-14 and 2014-15 owners can contribute up to an additional 45 million Euros to help their club break-even and 30 million Euros in 2015-16, 2016-17, and 2017-18.  After which time UEFA will make a decision about a lower amount.

Another fact about Financial Fair Play is that the break-even requirement is also supplemented by an extended monitoring period.  This monitoring period is for the 2-years previous to the 2013/14 season and 3-years there after.  This means that clubs may have a deficit in one of the three years but, as long as they post a surplus for the aggregate of the three years, they pass the test.  So, a club can post a surplus in T-1, T-2 but not T,  as long as the reported deficit is within the acceptable deviation for all 3 years, then the club passes the break-even requirement.  This entire process is defined in detail in Article 63.

The break-even requirement is not the only stipulation that dominates the FFP regulations, though the toughest to comply with.  Article 62 lays out 4 indicators that are monitored to determine if a club is in jeopardy of being denied a license to compete.[11]  These indicators are Negative Equity, Break Even Result, Going Concern, and Overdue payables.  Break even has already been discussed and dissected.  Negative Equity is based on a net liabilities position that has deteriorated as compared to previous reporting periods.  This means that clubs must actively manage their debt to keep their debt at consistent or reduced levels that can be earnestly managed.  Negative indicator 62-3-iv protects all club employees from being denied payroll.  It means that clubs must be able to pay all club employees and other vendors it owes money to.   The final indicator UEFA uses to judge clubs is in article 62-3-i.  It is titled “Going Concern.” The indicator will be breached if “the auditor’s report of the club included an emphasis of a matter or a qualified opinion/conclusion in respect of going concern.”  This clause allows UEFA to reserve the right to expel clubs that are putting their club in dangerous waters financially, but outside of the previously stated regulations.  These are the major aspects of UEFA’s Financial Fair Play regulations that are used to grant clubs a one-year license to compete in UEFA competitions.

If a club or individual is found to be in breach of these regulations the UEFA Club Financial Control Body (CFCB) has the ability and power to levy penalties on guilty parties.  The CFCB is made up of two chambers, the investigatory chamber and the adjudicatory chamber.[12]  Members serve a four-year term with an unlimited number of terms.[13]  The Control Body adjudicatory chamber can, under article 21, warn, reprimand, fine, deduct points, withhold revenue from UEFA competitions, prohibit registration of new players in UEFA competition, restrict the number of players a club can have in UEFA competition, disqualify a club from competition, or withdraw a title or award.  Similarly, the body can warn, reprimand, fine, suspend, or ban an individual from competition.[14]  These penalties are the same penalties that have been used in the past.  What will legitimize the CFCB is the precedent they set and the equality they have among cases as they proceed with their task of defending the FFP regulations.  A key factor is that Article 28 states that prosecution is barred after five years of the incident.

The CFCB has already punished several clubs for failing to meet the FFP regulations.  As of September 11^th 2012 the UEFA CFCB imposed sanctions against 23 clubs (Index A) by withholding prize money and setting an October 15^th deadline for the clubs to prove that their finances are in order.[15][16]  UEFA has also disqualified three clubs, AEK Athens of Greece, Gyor of Hungary, and Besiktas of Turkey, from the 2012-13 Europa League Season.  These are the first of such actions, which exhibit that UEFA is deadly serious.  The problem is finding out to what degree the clubs breached one of the four indicators so as to provide a base line for comparing future decisions.

FFP Concerns

One innate problem with UEFA club football and the FFP regulations is that the tax policies throughout Europe vary greatly and can have a huge impact on a club’s final financials.  In Europe players’ salaries are all done on a net basis so that they can be compared from one league to another.  Each club must pay the players’ taxes.  These taxes can add up very quickly when you are paying a top player a net salary of 10 million Euros and the income tax rate is 50%.  Well, since his salary is net 10 million Euros, you end up paying 15 million Euros for his services.  That extra 5 million Euros is a big difference when you are competing against another club in a country with a 15% tax rate.

The top bracket in the Premier League, for example, is 50% on income above 200,000 pounds ($316,000). In Russia, for foreign nationals, there’s a 13% flat rate. In France, if President François Hollande follows through on his campaign pledge, iast will be 75% on anything over 1 million euro ($1.25 million).  What does this mean? The take-home pay of a soccer player grossing $10 million could be as little as $2.8 million in France and as much as $8.7 million in Russia.[17]

This article has it wrong, however, because many players negotiate their contracts on a net salary basis so as to avoid paying high taxes, and their club ends up footing the bill.  FFP does not address the differing tax issues.

There are also problems with the terms and language within the regulations.  Article 58 of FFP regulations was discussed earlier and, as stated, it lays out what is and is not “relevant income and expenses.”  There are loopholes in UEFA’s criteria.  In article 58-1 “finance income” is considered relevant.  That is a very vague term.  What is stopping a club from gambling on risky and complex financial instruments in an attempt to side step the regulations by classifying the gambles as “financial income” to get ahead?  Or, in another instance, to lend money to a wealthy owner’s parent company at an interest rate that is above the market rate?

Similarly in Article 58-2 “expenditure’s on community development activities” are not considered relevant expenses.  If Arsenal redevelops the area around their new Emirates Stadium, they are developing the community and reinvesting in it, but this redevelopment will surely bring a profit from the increased property values.  Where does this fit into the guidelines?  On a positive note youth development is a discounted expense.  It is the goal of FFP to promote self-sustaining clubs and youth development is one way to cut expenses on transfer fees.

The biggest problem with the Article 58-1-2 is the term “non-football operations.”  Real Madrid is building a resort in the UAE with its brand name attached.  Since the resort is using the Real Madrid brand, does that make it a football operation?  If the team plays preseason exhibition games there does that make it a football operation?  Others agree with this sentiment,  “If a company says ‘We’re genuinely trying to build a global brand, this is a global club and we think this is what this deal is worth,’ it becomes quite difficult for UEFA,” said Daniel Hall, a partner at global law firm Eversheds. “It’s something that is very much open to subjective opinion and that is where there may be legal disputes.”[18]  Where is the clarity?

The last part of Article 58-4 states, “Relevant income and expenses must be adjusted to reflect the fair value of any such transactions.”[19]  Fair Value will have to be interpreted on a case by case basis but whose judgment will be used to make this decision and how will equality be maintained?  Building on this point, Article 11-1 states that UEFA, the licensor, will “ensure equal treatment.”[20]  Article 11 also states in subset 2 that, “The licensor guarantees the license applicants full confidentiality with regard to all information submitted during the licensing process.  Anyone involved in the licensing process or appointed by the licensor must sign a confidentiality agreement before assuming their tasks.”[21]  How can anyone outside of the license process judge if equality or fair value is being achieved  when the entire process is private? The FFP regulations stated that the goal is to protect the long-term viability of club football.   The fans are the heart and soul of club football.  But if they do not know their club’s financial position, how are they supposed to hold their club accountable?  How are they supposed to hold UEFA accountable?  UEFA states it will be equal but the ability to be absolutely equal and confidential with such vague regulations guarantees that problems will arise.

It gets even more interesting in Article 15 “Special Permission.”  UEFA reserves the right under the FFP regulations to grant special permission to lower division clubs if they earn UEFA qualification on sporting merit but are unable to go through the licensing process. [22]  This part of the regulations allows UEFA one of the many loopholes in the FFP regulations to make decisions as they please.  This article, however, only applies to lower division clubs.

Article 61 covers the amounts club equity owners can contribute to make up the club’s deficit.  This clause is perplexing for FFP was created to eliminate the ability for owners with deep pockets to bank roll their club.  Now UEFA is simply limiting the amount they can contribute but, nonetheless, still sanctioning it.

Finally UEFA throws another loophole into the regulations with 62-3-i “Going Concern.” The indicator will be breached if “the auditor’s report of the club included an emphasis of a matter or a qualified opinion/conclusion in respect of going concern.”  Without a numerical value “going concern” is open for interpretation and possibly inequality.  The regulation is meant to give UEFA the ability to govern new situations that cannot be imagined.  But it also gives UEFA and the CFCB the possibility to abuse their power.

Proposed Changes

Financial Fair Play in its current form is flawed.  Club football in Europe needs regulations to protect the institution.  It is the institution of club football that is in jeopardy of failing, not the game itself, as Michel Platini said in the previously mentioned Wall Street Journal article.  He said, “To me, it is a game — with many, many things attached.  It has to remain a game, or nobody will save it.”[23]  A few clubs that enter bankruptcy do not threaten the game of soccer but the institution of club football.  It is an institution that is exciting but must be tweaked.  Where FFP fails  is that it is too vague and bloated with red tape.  Its ultimate failure is that it attempts to fix club football by regulating the clubs in UEFA competitions instead of regulating the market within which UEFA clubs participate.

The largest expenditure clubs must burden is that spent on players.  For example, Manchester City spent 107 percent of revenue on wages last season (2011-12), and Inter Milan 104 percent.[24]  Stephen Dobson points out that players can attract such large salaries due to the capitalistic nature of the labor market and the marketability players have, as they are able to reach millions via technology.[25]   Unfortunately, this market is inefficient; there is not enough supply of elite level players to supply the many clubs that need their services.  This is true with players’ salaries but more evident in the transfer market where teams will pay millions of Euros for a player’s services.  This expensive outlay of capital does not guarantee the necessary dividend payments consistent championships would supply.

The authors of “Soccernomics,” Simon Kuper and Stefan Szymanskisaid, said “We studied the spending of forty English clubs between 1978 and 1997, and found that their outlay on transfers explained only 16 percent of their total variation in league position. By contrast, their spending on salaries explained a massive 92 percent of that variation.”[26]  Clubs spend millions on a new signing in hopes that one man will lead the team to glory.  It is apparent clubs are being repaid for one of their two major expenditures, player salaries, but transfer fees are wasteful spending.

To protect European club soccer UEFA must regulate the transfer market instead of regulating the clubs.  When there is a transfer it is compared against the last player to get the largest transfer fee.  A number that is going to continue to rise as there is no shortage of demand for the “best player in the world.”  What UEFA must do is either cap the amount of money a club can spend in the transfer market in one year, or cap the amount of money a club can spend on one player.  In doing so UEFA will establish a numerical value that can be applied to the best player in the world at any time.  If a club feels it is prudent to borrow money to invest in players within the cap then they can go ahead and roll the dice.  To expand you have to take risks, but the current FFP regulations limit a club’s ability to take those necessary risks and, in turn, simply protect the status quo consisting of clubs that currently have large revenue streams.

European club football is in a time of crisis, and just like a sovereign nation might issue a commodity prices freeze, UEFA needs to issue a transfer market fee freeze.  Players’ salaries have shown that they are directly related to a team’s return on expenditures, so I would advise a free market to continue.  Transfer fees in contrast are an unregulated market and one that does not equate to a desirable return on capital.

An updated FFP must also eliminate confidentiality.  Club football exists because of the fans that support their team and buy the team’s merchandise.   The fans and supporters have a right to know what is going on with their favorite club.   Additionally, UEFA should follow the DFB model and require clubs that participate in UEFA events to have a portion of their club owned by fans.  It may not be 50 percent, but involve the fans and make them a part of decisions.

To truly level the playing field, supporters must be given a larger voice in their club.  Financial statements must be made public and the transfer market has to be capped even if just for a crisis period to curb the exponential rise of transfer fees.  Are these solutions clubs would welcome?  That is the true conundrum of FFP.  The top clubs collude together to stabilize the market of European club football that ensures their financial dominance.  These top clubs will not agree to provisions that knock them from their position of dominance.  That is why any “so-called” Financial Fair Play regulations are not fair but a guise of equality to portray to the media and fans.

Conclusion

UEFA’s FFP is an honest try to fix the crisis in European club soccer, but it is by no means the solution.  It does a good job of beginning the process and conversation of protecting club football.  It is simply red tape that the larger clubs will be able to find ways through, for they have the resources to do so.  This red tape was brought on by capitalist expansion.

With the first major television rights deal European football has been on an explosive global expansion.  Football clubs were once simple local institutions where the fans were the club and the club was the fans.  Clubs like Millwall where Ultras define ‘“Millwallism” as a state of living and breathing relationship for one’s club that defines what it means.’[27]  As technology infiltrated European clubs it grew their ability to touch lives globally but also distanced them from those that matter most, the ones that were there from the very beginning.  They are the local, hometown fans that defined the club and the club defines them.  Now clubs must worry about the viewership of fans in remote parts of the world when their club is located in London, England for example.  Technology has distanced European club football from those that first defined the institution and must now find a way to balance them in the global and local marketplace.