In this two-part article we look at the UEFA Financial Fair Play rules. In Part 1 we provided an overview of the rules and the aims they seek to achieve. Today we will consider whether the rules do enough and where they are open to challenge.
Will the rules work?
In the French Ligue 1, where similar regulations have been in place for some time now, very few clubs have significant debt and several make profits. In the four years up to 2009 Lille OSC made profits in excess of €164 million. The secret to their success was developing their own players and selling them at significant profit to the heavily indebted clubs in the Premier League, La Liga and Serie A. With all clubs having to comply with these rules, the number of buyers able to purchase these prize assets will decrease meaning profitable clubs may find it difficult to maintain their model.
A review of clubs across Europe highlights that, with the exception of a very few clubs who have developed international brands, club finances depend on the balance between player purchase price and player sales price. As the credit crunch reduces revenues from advertising and sponsorship, player trading has greater significance than ever.
There are a number of other potential problems with the FFP rules.
The rules won’t affect leveraged buy outs where owners purchase clubs using significant borrowings to finance the purchase and then use the club income to pay the interest and debt. Two high profile examples of this in action are the purchase of Manchester United by the Glazer family in 2005 and the purchase of Liverpool by Tom Hicks and George Gillett in 2007. Leveraged buyout are permitted under normal stock market rules and the FFP rules will not affect them.
There is also an argument to say that contrary to the stated aim of ensuring the long term viability of European football the FFP rules will reduce competitiveness by enforcing the status quo. Bigger clubs with more revenue will gain an even bigger advantage under the rules. Come transfer time they will be permitted, under the rules, to spend significantly more than smaller clubs. This effectively gives them their pick of players and is likely to perpetuate the current gap between the top clubs and their smaller rivals. It is fair to say this already happens. Players faced with a choice between top flight football with prospects of playing in Europe or a club such as Reading who will be looking no further than to stay in the Premier League are already going to select the ‘top club’.
What the rules will prevent is investment such as that seen at Manchester City which has been big enough and sustained enough to transform the club to top flight football while generating a £194m loss. Opinions will differ on whether the prevention of this sort of transformative spending is a good thing for the game in general but in future spending at that level will not be possible. The knight in shining armour has been dismounted.
Top clubs are able to generate far greater income through sponsorship and this will remain an avenue for clubs to supplement their income. It is difficult to see Southampton managing to attract an Official logistics partner or an Official communications partner in Bulgaria, yet these are just some of the sponsors contributing to Manchester United’s coffers.
The current climate makes it very difficult for clubs to improve their finances. For example clubs in Italy are struggling to increase ticket revenues and generate sponsorship revenue, they are introducing salary caps and lower basic pay with higher bonuses but comments by Massimo Moratti, owner and President of Football Club Internazionale Milan, tell a story: “we are not yet able to balance the books. I don’t know how Italian clubs will play in the Champions league in future, if UEFA’s fair play is confirmed”. The loss of Italian clubs in European competitions would be a heavy price to pay for financial responsibility.
It is widely accepted that clubs will look to avoid the impact of the FFP rules through any means at their disposal and it is also generally accepted that there are many potential loopholes to be exploited.
The legal disputes
The first legal hurdle has already arisen. It was originally envisaged that there would also be the penalty of a transfer ban for clubs who failed to comply with the FFP rules but legal advice led to the removal of this penalty as potentially amounting to a restraint of trade.
Further disputes may arise in relation to external investment and sales to parties with a vested interest in the club in order to increase the allowable revenue being used in the break even equation. Questions have been raised, for example, over the naming rights deal for the Etihad Stadium which is funded by a company owned by the half brother of the club’s owner. This has been described as an ‘improper transaction’ by the Council of Europe. It is not the mere naming of the club that is objected to but the close affiliation of the owner and sponsor. Similar concerns arise with the three-year deal signed by Chelsea to make Gazprom its ‘global energy partner’.
The head of UEFA Financial Control Panel, Jean-Luc Dehaene has promised to scrutinise sponsorship deals and other contracts which may appear to be attempts to circumvent the fair play rules to make sure that the deal represents fair value. This will be a difficult legal question to determine as traditionally the English courts do not assess the value of the deal except in exceptional cases.
Third-party ownership of players in banned in the Premier League but permissible in Europe. Third-party ownership means that the club do not pay the full value of the transfer giving them an advantage under the FFP rules. A legal challenge to the Premier League position is anticipated.
Challenge is also anticipated in relation to the treatment of charity and solidarity payments made by clubs in the English Premier league which cannot currently be offset under the rules but amounts to about 14% of turnover and which substantially funds parachute payments for recently relegated clubs, the professional footballers association and various grass roots charities.