The New Financial Fair Play Rules

UEFA has released its new Financial Fair Play (FFP) rules.  They are found in the 2015 edition of the “UEFA Club Licensing and Financial Fair Play Regulations.”  I posted an article about the proposed changes last May when UEFA announced there would be changes to the FFP rules.  That article is here.  This article will be more easily understood if you have read that article.  Go ahead. I will wait for you.

My initial analysis of the new rules suggests that Gabriele Marcotti was almost exactly on target with his understanding of the proposed new rules.  The new rules only slightly modify the prior rules.  They do not reopen football to unlimited spending by rich club owners, but they do make provisions to alleviate the impact of the rules in some situations and to allow clubs to come to UEFA with a long term business plan that will break even plan even though it involves interim losses.  Before I discuss the actual changes, I should discuss several FFP developments that are not direct results of these rule changes, but can still have a significant effect on FFP.

MANCHESTER CITY AND PSG

Last season, Manchester City and PSG were subject to fairly stringent restrictions on spending and European squad size based upon their violations of FFP rules.  These restrictions were imposed pursuant to “voluntary settlement agreements” which can be found here and here.  Last month, it was announced that Manchester City and PSG will not be subject to same level of restrictions in the upcoming season.

These changes were not a direct result of the new FFP rules.  The changes are a result of the clubs’ compliance with the terms of their settlement agreements.  It was always contemplated that, if the clubs behaved themselves, they would be subject to greatly reduced restrictions in 2015-2016.  I cannot be sure that the limitations on the two clubs have not been loosened more than originally contemplated, but the fact that UEFA has banned Dynamo Moscow from European Competition for a year (see here) should make it clear that the FFP rules are still being enforced.  Dynamo’s violation was pretty extreme, however.  They lost over 302 million Euros when they were only allowed to lose 45 million.  Dynamo reported compliant results, but the adjustment to fair market value of their sponsorship deal with their “main shareholder” added at least 257 million Euros to their losses. 

THE COURT CHALLENGE

A second major change in FFP—unrelated to the new rules—arises out of the recent, partially successful court challenge to the FFP regulations.  See here. 

I have been unable to find a copy of the text of the decision on line so I can only go by the news reports which may not be completely reliable.

A court in Brussels referred the FFP challenge to the European Court of Justice and imposed a stay on the FFP rules that would reduce the maximum allowed loss for the current three year reporting period from 45 million Euros to 30 million Euros.  UEFA has appealed and claims that their appeal blocks the court’s ruling.  As a result, I have no idea what FFP limit is currently in effect.  A cautious club will try to keep their losses under 30 million Euros but it may not be necessary.  By the time it finally ends, this case might change nothing or it might eliminate FFP entirely.   As far as I can tell, UEFA plans to continue to act as if it is fully in effect.  However, they might have trouble imposing a penalty on a club that loses between 30 and 45 million Euros.

THE NEW FFP RULES

The actual new rules are found in Annex XI and XII of UEFA’s regulations.  The new rules are less definitive than the old rules.  Even though most things have not changed, the changes that were made leave a great deal of room for interpretation.  However, the core requirement that a club must limit its losses over a three year period to 30 million Euros remains unchanged.

VOLUNTARY AGREEMENTS

The rules now contain the brand new Annex XII covering “Voluntary Agreements for break-even requirement.”  These agreements can cover a period of up to four years.  However, not every club is eligible.  No club that has been a party to a prior voluntary agreement, a discipline measure, or a settlement agreement in the past three years can apply for a voluntary agreement.  If I am interpreting this correctly that means that there are 34 clubs that are currently ineligible to apply including PSG, Manchester City, Dynamo Moscow, and Hull City.

Clubs must also fulfill one of three other criteria:  they must have just qualified for European competition in the upcoming season, but not the current season; they must have fulfilled FFP requirements and qualified for European competition in the current season; or, they must have undergone a change in ownership or control in the past twelve months. 

If a club wishes to seek such an agreement they must apply by 31 December for the subsequent season.  For leagues on the normal European schedule this requires clubs to apply before they know for certain that they have qualified for European Football.  This deadline creates a logical conflict with two of the three possible eligibility requirements. Only the change in ownership criterion makes sense as the rules are written.  Possibly, the club must apply by December 31 without knowing whether they are actually eligible, but the final decision on the application will not be made until the end of the season when both FFP results and European qualifications are known.

The application must include a detailed financial plan for the future “based on reasonable and conservative assumptions.”   Funds covering the projected losses must be irrevocably committed in advance in a way that ensures the money will be there when needed.  UEFA gets to monitor the club very closely.

It is not clear what sort of business plan UEFA is looking for.  A business plan that proposes to spend huge amounts of money on football players and their salaries in order to qualify for the Champions League will probably not be viewed as “based on reasonable and conservative assumptions.”  If, for example, the owners of Crystal Palace, Aston Villa, West Ham, West Brom, Bournemouth, Stoke, Newcastle, and Sunderland all came to UEFA  with a business plan to spend their way into the Champions League, those plans will probably not be approved.  After all, we know that no matter how much money these clubs spend, they are not all going to qualify for the Champion’s League on a regular basis.  Quite likely, none of them will. 

A business plan for the club to build a giant, new stadium and use the vast increase in attendance to afford increased salaries in the future might pass muster, but FFP already excludes spending on new or improved stadiums so there would be no need to go to UEFA with such a business plan.  The same is true of a plan to expand the youth system or training complex.  Those expenses also do not count under FFP.

A club that is heavily in debt might reasonably present UEFA with a business plan calling for the owner (or, more likely, the new owner) to pay off the club’s debts and thereby eliminate the ongoing burden of the interest payments.  This would allow the club to spend more on transfer fees on a sustainable basis.  If a club was paying 50 million Euros a year in interest, UEFA might approve a business plan which called for the new ownership to pay off those loans—in their entirety—in three years and, in addition, contribute up to 50 million Euros a year to be spent on transfer fees or salary while the loans are being paid off.  The club could characterize this spending as reasonable and sustainable because, once the loans are paid off, the additional 50 million Euros would actually be available to spend every year. 

Of course, I do not run a football club. It may be obvious to the people who run football clubs exactly how a club can spend vast sums of money on players or other expenses that count against FFP  in a way that would guarantee increased future income even under ”reasonable and conservative assumptions.”  The fact that I do not know how to do this does not mean it is not possible.

EXCHANGE RATES

There is a new rule governing currency exchange rates.  If a club fails the FFP test due to the changes in exchange rates with respect to the Euro but would pass the breakeven test in their local currency, the rules state that the club “should in principle not be sanctioned.”  There is no indication as to when that principle would not apply.   This rule will normally only help clubs whose local currency has appreciated relative to the Euro.  However, there might be times when fluctuating exchange rates result in a club making payments or receiving income at a time when the exchange rate has just changed for the worse.

MAJOR ECONOMIC PROBLEMS

There is now a provision that makes allowances for “Major and unforeseen changes in the economic environment.”   UEFA is now permitted to take into account “quantifiable financial impact on the club of extraordinary national economic events” assuming the events are both temporary and beyond the normal fluctuation of the economy.  One would assume, for example, that if Greece left the Euro and, as a result, Greek clubs could not comply with FFP, they would not be sanctioned—assuming the Greek clubs seeking to play in European Football did not cause Greece to leave the Euro.  Presumably, if this provision and FFP had been in effect in 2008, there might have been a wholesale suspension of sanctions for violating FFP in the face of the Great Recession.  On the other hand, the continued poor economic environment caused by the European’s elite’s insistence on austerity will not be an excuse because, apparently, it is not temporary.

STRUCTURALLY INEFFICIENT FOOTBALL MARKETS

There is now a provision calling for the UEFA to consider whether a club “is operating in a structurally inefficient football market.”  The football market is defined as the territory of the UEFA Member Association.  Structural inefficiency is determined yearly based upon a “comparative analysis of the top division clubs’ total gate receipts and broadcasting revenues relative to the population of the territory” of the football market.  The provision provides no guidance as to what should be done with this information, but it is fun to speculate. 

I do not have access to all the information I need to evaluate structural inefficiency, but I can take a couple of stabs at it using information from the internet.

I found a link (here) to the total television receipts for the top leagues in England, Spain, Germany, France, and Italy.  I assume this was for the 2013-2014 season.

I divided the television receipts in euros by the populations of the various countries.  England, not surprisingly, came in first at 32.9 euros per person.  Spain came in second at 16.6 euros per person.  Italy, France, and then Germany followed at 13.9, 7.4 and 6.1 euros per person respectively.  To determine the actual figures for structural inefficiency I would need to have the total gate receipts for each league.  I do not have that information.  Nevertheless, television revenue is such a large part of the revenue stream in modern football that these figures are not completely meaningless. 

I also looked at Wikipedia and found a list of total revenue for the leading sports leagues from around the world.  (Here.)    I cannot vouch for its accuracy, of course.  Wikipedia did not provide the numbers I actually needed.  My first calculation using just television revenue was too under inclusive.  The total revenue calculation is too over inclusive because it includes commercial, player trading, sponsorship, and miscellaneous revenue all of which are not included in UEFA’s determination of whether a country has a structurally inefficient market.  I combined the Wikipedia income numbers with Googled population figures and did the division myself.  The countries are listed in order of total revenue.

The revenue per person, (in euros) for various countries is:

England                                 68.4

Germany                              28.2

Spain                                     41.4

Italy                                       27.9       

France                                  22.7

Russia                                    6.2

Turkey                                   7.4

Holland                                26.9

Portugal                              28.4

Ukraine                                 6.2

Belgium                              24.4

Scotland                             37.2

Switzerland                       21.1

All of these figures are high because they include too many types of revenue.  There is also no guarantee that the revenue that does not count is consistent across the various countries.  The English, German, and Spanish numbers, for example, should be lower due to relatively high sponsorship and commercial revenue.   Portugal and Holland likely have relatively high player trading revenue.  These numbers also do not account for the fact that some leagues do not contain 20 clubs.  I have no idea how or if UEFA intends to account for that problem.

However UEFA might calculate the structural efficiency of a football market, England is going to come out on top.  This may mean that English clubs will be held strictly to the FFP rules, but clubs from other countries will not.  In particular, Russia and the Ukraine look like strong candidates for more lenient treatment in future FFP calculations.  This could be of particular significance to clubs like Dynamo Moscow.  Possibly, under these rules, their spending, which was previously viewed as excessive would be viewed as reasonable because of the structural inefficiency of the Russian football market.

It is certainly not clear how much consideration structural inefficiency will receive.  If UEFA decides that the French football market is exactly half as efficient as the English football market does that mean that every French club should be able to make its FFP calculations as if they had twice their actual revenue?  Or will they only be allowed to pretend they have twice their actual television and gate revenue?  Or will all French clubs be required to use the same bonus fake revenue number based upon the average “missing” revenue for the typical club in Ligue 1?  Or will UEFA just double the amount of allowable losses? The answer is almost certainly none of the above, but that is the problem.  Right now no one can know how the structural efficiency rules will work.

Possibly, UEFA will determine a normal level of structural efficiency and only give special consideration to clubs from nations below that level.  Clubs from nations above that level might all be treated the same so England would retain its advantage over Italy and Germany, but not over Russia and the Ukraine.

Depending upon the methodology adopted by UEFA, English clubs may face a tremendous disadvantage under FFP.  Possibly, clubs from other countries will be able to spend more than they earn whereas English clubs will not.  Of course, such rules would only be a significant advantage for those clubs owned by sufficiently rich people. 

SUMMARY

The one certainty about these new rules is that they have transformed the FFP rules from the certain to the uncertain.  Prior to these changes (and the court decision) the FFP rules, for all their complexity, could be clearly explained.  Now they cannot.

Take, for example, PSG.  They are currently almost completely out of the FFP doghouse except that, because they have entered into a voluntary settlement agreement, they are not eligible to request a voluntary agreement for three years.  On the other hand, by any reasonable standards that might be applied under FFP, the French football market is less efficient than the English football market.  Can PSG expect to be treated more leniently in the future if they report excess losses?  How can they know in advance since they are specifically excluded from seeking a voluntary agreement?  Can they argue that their rich owner should be able to spend much more money than the rich owner of Manchester City because of France’s structural inefficiency?  Do the high French income tax rates factor into this at all?  I don’t think anyone knows.

EFFECTS ON SOUTHAMPTON FC

It is not clear how or if these changes will directly affect Southampton FC.  Most likely they will not have a very significant direct effect.  Southampton does not need to seek a voluntary agreement that involves deficit spending because the Liebherrs have, in effect, already created and followed such a plan.  It is not clear if there is a further “reasonable and conservative” spending plan that would improve our situation.

On the other hand, the fact that voluntary agreements might be available to help out other Premier League clubs could hurt us.  In my prior post, I speculated that a new rich owner might buy Aston Villa or Crystal Palace and put in huge sums of money.  A voluntary agreement would explicitly allow this.  However, it appears likely that the new owners could not just put in money to pay permanently higher salaries and transfer fees.  The increased spending must be sustainable from other sources by the end of the voluntary agreement.  That being said, however, there may very well be ways that a famous old club like Aston Villa or a London based club like Crystal Palace could use additional money to permanently improve their financial position.

Depending on how the structural inefficiency language is implemented, the new Financial Fair Play rules have the potential to greatly weaken England’s position in European competition.  Almost certainly, the structural inefficiency rules will never help English clubs spend more money so they can only result in benefits to clubs from other countries.  Of course, only those clubs with rich owners can benefit significantly but there are rich owners of clubs in Russia, France, and the Ukraine who would be willing to pay higher salaries and transfer fees even though they are losing money.  These clubs will be able to compete with Southampton to sign good young players who want pay raises.  Absent this change in the rules, once the new TV contract kicks in, there would be only ten to 15 non-English clubs in Europe that could compete with Southampton on wages.  That number could be significantly higher after the structural inefficiency rules are applied. 

Earlier this year I published an article entitled “Financial Fair Play: Friend or Foe?” and concluded that, overall, FFP was Southampton’s friend.  The answer is no longer clear.  It still provides us with structural advantages over most clubs throughout Europe. However, we will now, very likely, have more competitors for the younger players with potential we seem to want to sign.