Financial Fair Play Rules: Q&A

First Published in Late Tackle magazine

Financial Fair Play Rules, to the layman, appear to be having little impact on Premier League club’s spending and high-profile figures including Arsene Wenger and Liverpool owner John W Henry have already voiced concerns that the measures aren’t tough enough. With this in mind, we spoke to football lawyer Daniel Geey.

If most fans are like us, they will have had a go at reading the FFP rules…then given up when their heads started to hurt. The rules aren’t exactly straightforward – have UEFA created problems for themselves by making the rules so complex?

There is little doubt that the rules are dense, detailed and complicated. I’m sure that UEFA would argue that the rules have needed to be drafted in such a way so that there is adequate detail, guidance and explanation as to what clubs need to do to comply with the rules. Let’s not forget that the Financial Fair Play Rules (FFPRs) are probably the most significant rule changes that have been brought in to govern football club finances in a very long time.

In very general terms, FFP is advocating that clubs don’t spend more than they earn. That being the case, why are Man City (£121m loss in one year to summer 2010) and Chelsea (£70.9m loss in one year to summer 2010) seemingly unconcerned and happy to continue to fork out massive transfer fees and huge wages?

There was an interesting symmetry that on the same day that Chelsea announced £71m losses, it spent an almost identical amount in transfer fees on David Luiz and Fernando Torres.

Many commentators believed such spending would mean Chelsea would be in real trouble of passing the FFPRs. However, when looking at Chelsea’s spending on youth development and infrastructure (which can be deducted as a cost from the FFPRs), wage reductions from high earners in the past like Carvalho, Ballack, Deco and Cole who had all left the club in the previous season’s accounts, a profit made on transfers and deductions on Annex XI wages for contracts entered into pre-June 2010, it starts to become apparent that it may well be possible for Chelsea to make a ‘standard’ accounting loss in the next few years but still receive a UEFA license to participate in the Champions League[1].

Manchester City because of their latest sponsorship deal with Etihad are obviously now in a much stronger position to comply with the FFPRs. Compared to previous seasons however, City’s net spending is considerably down.From £117m in 2008-9, £99m in 2009-10, £126m in 2010/11[2], City have so far spent £35m net on Gael Clichy, Stefan Savić and Sergio Agüero. [This is before the impending Nasri purchase which may take the figure north of £50m.]

With the likelihood of Bellamy, Adebayor, Bridge and Tevez substantially reducing the wage bill further and City recouping some transfer revenue too, there is certainly a trend towards wholesale spending reductions. It may be that some additional players are recruited but I would still expect City’s net spend to be considerably down from previous years in part due to the need to comply with the FFPRs.

There can be little doubt that the FFPRs are affecting the financial plans of every club wishing to play in European competition.Clubs will have done their sums and worked out their financial breathing space. This will certainly be the case because the clubs have been in consultation with UEFA for a significant amount of time before the FFPRs were adopted in May 2010.I would be mightily surprised if a club wanting to participate in UEFA club competition in the 2013-14 season was significantly over the standard deviation provisions.

To our eyes, too many of the rules contain subjectivity, or in other words, potential get-out-of-jail-free cards. So there’s the possibility of writing off wages on contracts signed before 2010 and there’s plenty more in the rules suggesting UEFA won’t be particularly strict, certainly for the next three or four years. Would you agree, and why do you think UEFA have set it up this way?

Clubs have had a large say in the drafting of the rules; and as a result some provisions do give clubs leeway to comply with the FFPRs.The rules are a product of collaboration and negotiation between UEFA and many of football's interested parties. The FFPRs are there to give clubs time to comply.

My understanding of the consultation process with UEFA and the European Club Association (ECA) is that a number of concessions were made (i.e. the Annex XI provisions (see below), the staggered acceptable losses approach and the removal of all infrastructure and youth development costs from the break-even calculation) in order to gradually get clubs across the finishing line.

My belief is that the rules are not in place to catch clubs out; they are there to guide clubs into a more responsible era of spending where everyone plays by the same rules of the game. UEFA describes it as adding “rationality” into the football finance game.I think fans need to understand the overall objective for the rules is to bring clubs into line. This may not happen overnight and people may not be happy that break-even from the first monitoring period is not actually break-even.

However the benefit of this incremental approach is that the top clubs will have to ensure that over a limited time they break-even. UEFA believe this approach safeguards the long-term sustainability of European football.In making specific reference to the Annex XI(2) provisions that you mention, the rationale for the pre-June 2010 carve-out is that first publication of the rules occurred in May 2010.

Quite understandably, clubs believed it would be unfair for contracts that were entered into before publication of the rules to be subject to the rules. In practice, this does provide a significant buffer for clubs in the first two years of the FFPRs.The other point of contention for many commentators at present is the related party transaction issue with Etihad and Manchester City. I will deal with this below.

The ultimate sanction is barring a club from European competition – can you see this happening to a big club?

The UEFA Disciplinary Regulations provide for a whole host of possible sanctions including a reprimand, a fine, disqualification from competitions in progress and/or exclusion from future competitions or withdrawal of a licence.UEFA’s general secretary, Gianni Infantino, has recently stated: “we would bar clubs in breach of the rules from playing in the Champions League or the Europa League. Otherwise, we lose all credibility.”I believe if a club falls significantly outside of the standard deviation provisions and does not fall within the Annex XI carve-outs, there is every likelihood it will be refused a license. There is precedent too. Real Mallorca were refused entry into the 2010-11 season’s Europa League because they failed to meet the UEFA Club Licensing entry criteria.

Similarly, Romanian team FC Timisoara have not been granted a UEFA license for the upcoming season. Such instances illustrate the power UEFA has (through national associations) to refuse a club license application. When the FFPRs are added to the license criteria in time for the 2013-14 season, the rules will be stricter than those that applied to Real Mallorca and FC Timisoara.

A future high profile UEFA club license refusal should not be ruled out.

Man City’s reputed £400m naming rights deal is the largest of its type in sport. How is that fair? Isn’t the point of the rules to dilute the power of sugardaddy owners?

The issue from UEFA’s perspective with the Etihad deal is three-fold. First, UEFA will need to establish whether the sponsorship deal is a related party transaction (RPT).The Abu Dhabi government own Etihad Airways whose ruler Sheikh Khalifa is the half-brother of Manchester City owner Sheikh Mansour. In order for the deal to be caught under the UEFA RPT provisions, it would need to be demonstrated that Sheikh Khalifa had some type of influence over Manchester City.

It would be for UEFA to join the dots. If the agreement is not a RPT, UEFA will not look at the value of the deal in any more detail.

Second, if the Etihad deal is deemed to be a RPT, UEFA will be faced with an interesting issue of how to divide the deal revenues between the shirt sponsorship, the stadium naming rights deal and the Etihad Campus development.

A type of benchmarking exercise will need to be carried out to assess what UEFA considers will be “fair value.” If UEFA considers the deal has been at a fair value, that will be the end of the matter.

Lastly, if UEFA concludes the deal has not been at a fair value, the revenue for the benefit of calculating Manchester Ciy’s license application will be reduced to the level UEFA believe is appropriate.

My understanding is that any investigation into the sponsorship agreement will only take place when all the information is requested from City in time to consider its 2013-14 license (i.e. when the FFPRs actually kick-in and not before).

Platini has suggested that if clubs try to circumnavigate the rules in ways UEFA didn’t think of, they may change the rules to close any holes in FFP. What do you think the rules should include if they are to achieve what UEFA set out for them to do?

That is a tricky question because it all depends on each individual’s perspective of what the rules are there to accomplish. The RPT issue discussed above is one of massive interest because a number of clubs believe the sponsorship deal is a way of circumventing the rules.Article 53 of the FFPRs state that UEFA “will at all times bear in mind the overall objectives of these regulations, in particular to defeat an attempt to circumvent these objectives.”

I think that only after the first couple of monitoring periods where licenses have been submitted and further investigations carried out by UEFA will the organisation be able to forensically police the regulations and uncover any practices that go against the spirit of the rules. In this sense, UEFA will have to be somewhat reactive to close potential loopholes.

FFP was about creating a more level playing field – making football more ‘pure’ if you like – but isn’t it already having an unwanted side-effect? Aren’t clubs now even more savagely capitalist as they chase the increased revenue that will allow them to sustain the crazy spending levels? And isn’t there only one loser in all this – the fans?

I’m not convinced that one of UEFA’s main aims is to create a more level playing field.

If you look at the FFPRs in the objectives section, I believe the main idea is one of self-sustainability and responsible spending. This translates into clubs spending what they earn which in turn may level the playing field because only revenue generated by the club can be reinvested in the playing squad.

I believe that a consequence of the rules will actually be fewer ‘crazy’ owner-generated spending sprees (though I may be wrong!).

A result of incentivising clubs to grow their commercial revenues will be a reassessment about ticket prices. But that is a club decision to ensure that the right balance is struck between disenfranchising fans with large ticket price hikes and affordable ticketing policies.

I’m not sure the FFPRs can be solely blamed for ticket price increases when there are many different ways for clubs to further commercialise their revenue streams.

Similarly, the FFPRs are encouraging clubs to invest in sustainable, long-term revenue generating assets like stadiums or youth development (which is removed as a cost for break-even calculations).

This potentially allows more people to watch games, with improved facilities including corporate entertainment thus driving greater revenues to be reinvested.The bottom line is that UEFA does not want clubs “chasing the dream” spending big, and not having revenues to service debt, wages and transfer fees etc.

There is a statistic in the excellent Supporters Direct No.2 Briefing Paper[3] that 81 clubs who are, or who have been, in the top five English divisions have suffered from an insolvency event since 1986. Fans have borne the brunt of over-zealous spending and the consequences of administration.

UEFA is trying to find a solution to such football club financial failure in order to make European clubs self-sustainable.

By motivating clubs to only spend what they earn, clubs know the regulatory framework that they have to keep to. With the rules likely to come into force in the Football League in the next few years, it appears the UEFA concept is gaining momentum.

This issue does also feed into the recent Select Committee Report into Football Governance which recommended a form of club licensing. Many fans will be comforted in the knowledge that kamikaze spending by owners (without the revenues to back it up), will be outlawed.

This should have the effect of safeguarding the long-term viability of clubs in European competition and lessening the risk of administration or even worse.

[1] See the excellent Swiss Ramble blog and in particular http://swissramble.blogspot.com/2011/02/chelseas-financial-fair-play-challenge.html?utm_source=BP_recent

[2] Figures from http://www.transferleague.co.uk/premiership-transfers/manchester-city-transfers.html

[3] http://clients.squareeye.net/uploads/sd/SD_Brief_no2.pdf