A Sporting Insight
Financial Fair Play? Or an unfair system?

The following article is a free-to-view version of an article published in the World Sports Law Report, Volume 10, Issue 5 (May 2012). The original version can be viewed here: http://www.e-comlaw.com/world-sports-law-report/article_template.asp?Contents=Yes&from=wslr&ID=1437

Introduction

There are a large number of articles by sports lawyers, members of the sports industry and journalists explaining the requirements for compliance with UEFA’s Financial Fair Play Regulations (FFPRs). However, after the high profile spending on transfers and wages by clubs such as Manchester City, many fans - including myself - have sought to understand how the FFPRs will affect the fairness of the English Premier League.

Joaquin Almunia, Vice President of the European Commission, recently released a statement saying that the regulations are consistent with the aims and objectives of European Union policy in the field of State Aid - the main idea of State Aid being that, “European undertakings should compete on a level playing field” [http://ec.europa.eu/competition/sectors/sports/joint_statement_en.pdf].

This article focuses on the detrimental effect of the FFPRs on the Premier League and argues that Almunia, and others who salute the FFPRs as a step-forward in the pursuit of a level-playing field, are misguided.

UEFA’s objectives

Article 2 of the Regulations states UEFA’s objectives:

- Improve economic and financial capability of clubs.

- Introduce more discipline in club football finances.

- Encourage clubs to operate on the basis of their own revenues.

- Encourage responsible investment for the long term benefit of the club.

- Ensure cubs settle their liabilities on a timely basis.

- Protect long term sustainability of European club football.

The third is the objective that has found itself subject to most of the controversy. If UEFA’s overall aim was to protect the long-term security of clubs engaging in excessive spending, it would only need to prevent expenditure that went beyond a club’s means. By linking expenditure to revenue, even clubs who can afford to spend in excess of their revenue without resorting to unsustainable debt financing are restricted in their expenditure.

However, consider the ‘inflationary’ effect that such spending has had on pricing other clubs out of the transfer market. Although not present in the Regulations themselves, UEFA state clearly that one of their objectives is to prevent the inflationary effect that has occurred as a result of clubs, such as Manchester City and Chelsea, spending in excess of their revenue [www.uefa.com/uefa/footballfirst/protectingthegame/financialfairplay/index.html].

It is my belief that in drafting the rules, UEFA’s objectives focused too much on commerce and too little on the beautiful game itself. There are few who believe that ensuring that all football clubs spend money fairly and responsibly is an illogical view; however, there is a need to understand that in exercising this, consideration must be given to the unique industry to which the rules apply. Football has distinctive qualities which are not present in other conventional industries. Most notably, in no other industry do consumers demonstrate the brand loyalty that we see from football fans. Consequently, when deciding on regulatory changes to the financial structure of football clubs, it is imperative that considerable weight is given to the fans’ main desire - that football be an entertaining and competitive sport. In other words, money should be spent in a way which breeds fair competition on the pitch.

Do the rules only affect the big teams competing in the Europa League and the Champions League?

A significant number of articles surrounding the FFPRs have been written on the premise that the rules do not have a direct effect on the Premier League. The Premier League has not adopted any specific rules on financial fair play. Therefore, were a team to fall foul of the FFPRs, it would suffer no domestic punishment. However, to assert that the FFPRs therefore do not have a direct impact on competition in the Premier League is incorrect for the following reason:

One of the great attractions of the Premier League is the exciting competition for European qualification. Whether battling for that coveted sixth league position or looking to consolidate a mid-table finish with the long-term aim of reaching it in three years, the thrill of competing on the European stage (and the additional revenue that comes with it) is what the majority of Premiership clubs strive for. Remove the incentives of European football and the legitimacy and competitiveness of our league is almost entirely undermined. Consequently, in controlling eligibility for European qualification, the FFPRs directly affect all teams seeking to improve their league performance.

The FFPR’s requirement to break-even

The overall effect of the break-even rule is that a club’s expenditure must equal its revenue. Although there is some inbuilt leeway in the early stages, because they are merely transitional measures, their long-term effect on the Premier League will be negligible and so won’t be considered in this article [For a more comprehensive analysis of how the rules work, see ‘Financial Rules: UEFA’s Financial Fair Play Regulations: analysis’, World Sports Law Report (WSLR) Volume 8 Issue 12, December 2010; ‘UEFA FFPR Regulations: the grounds for legal challenge’, WSLR Volume 9 Issue 3, March 2011; ‘UEFA’s FFPR & ‘third party’ rules: an English handicap’, WSLR Volume 9 Issue 12, December 2011 and www2.warwick.ac.uk/fac/soc/law/elj/eslj/issues/volume9/number1/geey/].

While a wealthy owner may still purchase a football club, should they wish to participate in European competitions, they will be limited to spending in line with the club’s existing revenue streams and so will not be able to immediately compete with the financial supremacy of the ‘big’ clubs. Consequently, ‘smaller’ clubs will find it more difficult to overcome the competitive edge possessed by the ‘big’ clubs [References to ‘big’ clubs or ‘elite’ clubs are referring to those clubs who generate the highest revenue - Manchester United, Chelsea, Arsenal and Liverpool. Their combined revenue exceeds the cumulative value of the revenue generated by all other 16 Premier League clubs in 2010. Of course, it must be noted that since these figures were published, Manchester City’s revenue will have almost certainly increased to the level of one or two of the ‘big four’ and so they can also be deemed to fall into this category].

Proponents of the FFPRs, such as Michel Platini, oppose this outlook and highlight that there are some significant areas of expenditure that are excluded from the calculations such as expenditure on stadia, training facilities and youth development. They point out that by allowing uncapped expenditure in these areas, the FFPRs do not dampen the aspirations of smaller clubs; rather they are designed to encourage their ambition as long as it is implemented in a sustainable way and not by unsustainable investment in transfer fees and wages. However, a review of the practical consequences of these exclusions shows that the reality is that they are insufficient to enable teams to challenge those clubs who currently generate higher revenue streams:

1. Exclusion of expenditure on stadia

The first type of exclusion in the break-even calculation is expenditure on stadia, but this offers little - if any - assistance to ‘smaller’ clubs looking to grow. A club is only in need of a bigger stadium in a situation where there is sufficient existing demand to justify this decision, such as the rationale behind Arsenal’s move away from their traditional home to the Emirates and the ongoing efforts by Spurs and Chelsea to relocate to maximise their gate receipts. There is therefore a ‘catch 22’ scenario for many clubs as they cannot achieve this demand without having players of the required quality to increase it. Such players cost vast sums of money. Without the demand, there is no benefit to a bigger stadium which would - in reality - just mean more empty seats. Consequently, one can see that the need for a larger stadium is an effect rather than a cause of growth.

Furthermore, and potentially even more damaging, is that this exclusion may have the result of benefiting those bigger clubs with excess demand for tickets, who can justify the decision to expand their stadia or relocate. If they opt to expand, their revenue will further increase and they will therefore have increased revenue from which they can draw to cover transfer fees and wages. Thus, this exclusion may in fact increase the gap between the bigger and smaller clubs.

2. Exclusion of expenditure on training facilities and youth development

The second exclusion that this article will examine is not as obviously ineffective as the exclusion on stadium expenditure and may, if correctly handled, promote the sustainable growth of smaller clubs. However, I believe that the result is still limited in its effect and offers little consolation to the overall break-even requirement.

A number of the brightest talents in England are initially recruited and trained by ‘smaller’ clubs prior to being purchased by ‘larger’ ones and some of these players have indeed moved for significant sums such as Chris Smalling, Theo Walcott and Phil Jones.

So there is an argument that a club which can establish itself as a centre of youth excellence - such as Southampton FC - can develop and sell players, receiving significant sums of money from the transfers which can then be re-invested into the club. As a result, the club has more money available to spend on transfers and wages in order to build a stronger team. Furthermore, if a club can produce a continuous stream of talented youth, it will, surely, be able to hold on to some of them and combined with the spending money it will receive from the transfers of the few that leave, such a club seems to have positive prospects.

However, consider how the FFPRs could affect expenditure by bigger clubs on youth because there could be two knock on effects which will hinder smaller clubs growing in this way.

Firstly, because they must now ensure that they comply with the break-even requirement, ‘big’ clubs will not be able to spend the vast sums that they have done in recent years on young players such as Adam Johnson, Gareth Bale and Theo Walcott, so players of their calibre could end up moving for less, thus offering a smaller reward for youth development. Secondly, bigger clubs are encouraged by the exemption to invest heavily into their own youth academies, opening the possibility that they could start to dominate that aspect of the game as well as the transfer/wage market.

Finally, and removing any possibility that smaller clubs can significantly benefit from this exclusion, is the new Elite Player Performance Plan, expected to be introduced in time for next season [www.premierleague.com/content/premierleague/en-gb/youth/elite-player-performance-plan.html].

The new plan cements the transfer fee a football club can receive in exchange for its youth products depending on the academy’s position in the newly introduced ‘hierarchy’. Whilst ensuring that the average remuneration for youth players will be slightly higher, remuneration for ‘elite players’ is astronomically reduced. Had the rule been in place at the time of Gareth Bale’s transfer to Tottenham, Southampton would have been compelled to accept a fee of around £200,000. Not surprisingly, some smaller clubs have been outraged at this development and there have even been accusations that Premier League clubs blackmailed smaller clubs into accepting the FA’s proposals by threatening to withdraw youth development funding.

When looked at in combination with UEFA’s FFPRs, it becomes quite clear that the Elite Player Performance Plan was proposed to reduce the outlay bigger clubs spend on young talents, enabling them to comply with UEFA’s rules far more comfortably and allow participation in European competition.

Let’s assume that a club that does not suffer from these effects and manages to grow via the encouraged sustainable means. Even in this scenario, that club will hit a wall surrounding the Premier League’s elite. Such a club is unlikely to be able to purchase the players with the quality to help them break into the elite without offering the inflated wages that Chelsea was offering back in 2004 and that Manchester City has been offering over the last two years, because their status alone will not attract them. This inability to buy top players is furthered by the Premier League’s own prohibition on third party ownership, resulting in the full cost of buying and paying a player being taken on by the club in all circumstances [Apart from France, all other European leagues have no such restriction and this highlights another significant problem with the FFPRs, in that clubs in leagues without this restriction have an unfair advantage in the transfer market over those that do. See ‘UEFA’s FFPR & ‘third party’ rules: an English handicap’, WSLR Volume 9 Issue 12, December 2011].

Overall impact on the Premier League

In implementing the FFPRs, UEFA has ignored the realities of what it takes for football clubs to grow and, consequently, the Premier League will indeed become less competitive with predictability levels increasing.

Many will argue that this situation has been around since the start of the Premiership and it is the way of professional football that some teams will always be better than others. Some have gone as far to say that the league has, in essence, comprised several mini-leagues over the last couple of decades. However, the influx of money from wealthy chairmen such as Jack Walker (Blackburn Rovers FC), Roman Abramovich (Chelsea FC) and Sheikh Mansour (Manchester City) clearly improved competition at the top of the game and removed the barriers surrounding the ‘mini-leagues’. With the introduction of the FFPRs, similar investments are not possible and whilst there may still be a team that ‘outperforms’ expectations, such as Everton FC’s top four finish in the 2004/5 season, the likelihood is that they will become even more infrequent.

Perhaps UEFA’s objectives aren’t as laudable as they seem

Refer back to UEFA’s aim of reducing the inflationary effect that has been caused by clubs spending in excess of their revenue. This is UEFA’s justification for linking expenditure to revenue instead of allowing clubs to spend within their means. But consider the following. Prior to wealthy investments by Abramovich and Sheikh Mansour, certain clubs had long been exercising dominance in the transfer market, outbidding clubs unable to match their financial clout. Yet UEFA has only begun to label the consequence of outbidding as ‘inflationary’ and in need of action when it is clubs who are new to such expenditure, like Manchester City, Chelsea or Anzhi Makhachkala, outbidding others. UEFA’s apparent ‘concern’ may be attributed to a more cynical objective.

Perhaps UEFA has recognised that Roman Abramovich and Sheikh Mansour may have set a trend which, if followed, could see the Champions League’s consistent qualifiers - those whose participation gives UEFA the greatest income such as Real Madrid, Manchester United, Liverpool and Arsenal - out-competed in the quest for Champions League qualification. Perhaps the damming effect that this would have on UEFA’s wallet has scared them into cementing the status quo, rather than a genuine concern for the long-term sustainability of European football.

Or perhaps I am paranoid and perhaps, as their tag line says, UEFA care about football.

Daniel Clyne (Follow on Twitter @danic3333)

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