Financial Fair Play Regulations Legitimate or not? - Part 1
The Union of European Football (UEFA) created the Financial Fair Play Regulations (FFPRs) as part of its already-functioning club licensing system to ensure that clubs break even in the long run. The FFPRs' overarching goal is for UEFA's affiliated football clubs to balance their books, avoid spending more than they make, and stimulate investment in their stadiums, training facility infrastructure, and youth development.
However, one does wonder whether the FFPR do in reach these goals and if so, whether proportionality is taken adequately into account?
It has been argued by Daniel Geey, sports lawyer that this concept of self-sustainability relates to UEFA's underlying belief that transfer fees and wage inflation will continue unabated because each new set of club owners injects more money into the European football club market; this “keeping up with the Jones's effect” spirals further out of control as owners are forced to outbid other high-spending clubs, resulting in financial insolvency. However, a devil’s advocate may reply to such an argument by asking: “shouldn't the owner have the freedom to decide how much money he invests in the club in order to acquire high-profile players?”
It's worth noting that the FFPRs apply only to Champions League and Europa League participation, not to local competitions. Each club having a chance of qualifying for that season's European tournaments must apply for a UEFA Club Licence prior to the start of that season. The sanctions related to breaching the FFPR started in the 2013-2014 season.
Most of the key requirements of the Financial Fair Play have not changed since: (I) it emphasizes transparency and credibility by establishing minimum disclosure requirements for clubs' financial statements; (II) it requires clubs to demonstrate that they do not have any outstanding payables to other clubs, their players, or social/tax authorities throughout the season; and (III) it requires clubs to comply with the break-even rule. In particular, the break- even criterion for FFP requires that relevant earnings and spending largely balance throughout the course of the reporting period, and that any discrepancy must be below a certain level.
Non-compliance with the FFP standards can result in a variety of sanctions ranging from warnings and fines to disqualification or removal from UEFA tournaments (i.e. the Champions League or Europa League). The European Commission seems to approve the FFPRs in the white paper on sports, which states exactly; The transfer of players also gives rise to concerns about the legality of the financial flows involved. To increase transparency in money flows related to transfers, an information and verification system for transfers could be an effective solution. The Commission considers that such a system should only have a control function; financial transactions should be conducted directly between the parties involved. Depending on the sport, the system could be run by the relevant European sport organisation, or by national information and verification systems in the Member States.
From this point of view, it can be said that the Commission allows FIFA to set the FFP regulations and interact or at least, does not dissent. In fact, in March 2012, UEFA and the European Commission struck a cooperative agreement, in that agreement it states that objectives of the FFP regulations are “consistent with the aims and objectives of European Union policy in the field of State Aid.” The author of this thesis deems it likeable that this is aimed at preventing clubs from challenging the legitimacy of FFP through the EU judicial system, e.g., by alleging that it violates the EU's anti-competition legislation. According to the author, this is truly alarming; when the European Commission enters into a cooperation agreement prohibiting anyone from challenging the FFP in an EU court, this may be interpreted as a breach of fundamental human rights, such as Article 47 TFEU and demonstrates the footballing organizations' dominance once again.
The aim of this thesis is not to determine whether the financial fair play regulations are successful in reaching their goals or not; Rather, the focus is on whether the financial fair play regulations comply with EU law.
The political support for UEFA's is apparent in the white paper on sports, the Commissions agreement, Court rulings and the organisations behaviour. As an example of this support is e.g. the cooperative agreement between UEFA and the European Commission, the Daniel Striani case and how UEFA have acted regarding the FFPRs and the super league. The European Commission stated in 2009 that a licensing system, such as UEFA's FFP, may be viewed as necessary for the functioning of the European sports model, and that the primary objective of financial criteria for licensing regulatory programs is to ensure clubs' viability within sporting competitions. In 2011, the European Commission declared unequivocally that one of the fundamental goals of sport regulating organizations is to ensure the financial viability of sports clubs. UEFA also carefully sought advice from the European Commission throughout the development of the regulations. Andrea Traverso, then-Head of Club Licensing and Financial Fair Play, acknowledged that UEFA spoke with the European Commission to ensure that FFP complies with EU law. Consequently, as in 2012, The European Commission issued the joint statement with UEFA supporting the regulation.
In this context, media reports on PSGs acquiring Neymar JR. for 220 million pounds from FC Barcelona sparked attention, as the new FFP regulation make it harder for PSG to afford such an amount. However, a closer examination of the move reveals that the 220 million pounds spent on Neymar is not a complete loss; when Neymar, the celebrity, comes to Paris, television and commercial contracts can increase, since he sells a variety of items ranging from cups to shirts. In other words, Neymar draws people’s attention. With his talent, PSG are more likely to win trophies such as the Champions League, which brings the club a lot of money, and he has gained support from South America. Bearing this in mind, according to the author of this thesis FIFA appears to have overlooked the big picture while developing the FFP regulation.
Adjustments to FP
Following the first appearance of FFP and the following legal challenges, UEFA updated FFP to reflect the latest developments. Even though most of the challenges to various components of FFP were ineffectual, the regulations were relaxed to allow for greater equity participation by owners. Apart from that, UEFA has provided clubs with an additional tool: the ability to engage into Mediation and Voluntary Agreements, which are normally associated with less severe repercussions for teams that have or will breach the FFP's break-even criteria. One might inquire, since there are so many exclusions from the fundamental FFP requirements, why do we even have them in the first place? However, diving into this issue would provide material for an entirely new thesis.
A club may join a Voluntary Agreement if its ownership or control has changed significantly during the twelve months preceding the application deadline. However, a club must not have been a party to a Voluntary Agreement or been subject to disciplinary action during the three reporting periods before the submission of the application. Bear in mind that if a club changes owners as a result of disciplinary action taken against them within the three reporting periods before the filing of a fresh application to join a voluntary agreement, according to the author of this thesis, this must be regarded a major obstacle, and a potential breach of Art. 101(1). In contrast to Settlement Agreements, which are ex post arrangements, Voluntary Agreements are ex ante agreements that allow clubs to diverge from FFP norms in the future with the goal of meeting the break-even criterion. Voluntary Agreements are defined as “a structured set of obligations which are individually tailored to the situation of the club” To engage into a Voluntary Agreement, an application must be submitted by December 31 of the licensing season preceding the one in which the agreement would take effect. Additionally, the submitting club must present a long-term prospective business plan that includes a balance sheet, profit and loss statement, and cash flow statement. After submitting its application, the club must demonstrate its ability to accomplish its stated objectives. Following that, the Club Financial Control Body’s (CFCB) investigatory chamber analyses each application and, if accepted, oversees the Voluntary Agreement's appropriate and timely execution. The CFCB's refusal of AC Milan's (Milan) application for a Voluntary Agreement provides an illustration of the application procedure. Milan is one of Italy's most respected and greatest football clubs. Milan had changed ownership eight months prior. CFCB rejected Milan's Voluntary Agreement, citing "uncertainties about the refinancing of the debts due in October 2018 and the financial assurances offered by the principal owners."
After conferring with other members of the investigatory chamber, the CFCB investigator has the authority to enter into a Settlement Agreement with the investigated club at the completion of an inquiry. Similar to a Voluntary Agreement, a Settlement Agreement may include provisions for the club's essential duties, which may include disciplinary sanctions. More importantly, the severity of future obligations are dependent on the severity of the deficit. An example of a Settlement Agreement application is F.C. Internazionale Milano S.p.A (Inter), where the CFCB concluded that Inter failed to meet FFP’s break-even requirement during the 2014-15 season because it posted a larger-than-permissible deficit.
Inter committed in the Settlement Agreement to maintain a break-even deficit of up to €30 million in the 2016 reporting year and a balanced budget in 2017. Additionally, for violating FFP during the 2014-2015 season, Inter was fined €20 million, which was deducted from the club's Europa League earnings. €6 million of the total was to be paid in full regardless of the team's success, while the remaining €14 million was conditioned on Inter's continued compliance with FFP. According to this thesis author money withdrawal from prize rewards is extremely onerous; Inter should have been permitted to pay in their own self-interest.
Additionally, Inter agreed to a player cap for future UEFA club tournaments. Taormina finds that the above-mentioned FFP adjustments might be viewed as a direct response to the Article 101 difficulties and a means of protecting UEFA from future ones. As noted previously, UEFA's legal victory will be contingent upon the proportionality of its regulations and disciplinary procedures in relation to its aims. The inclusion of Settlement and Voluntary Agreements has increased the flexibility and, presumably, the proportionality of FFP. However these agreements presumably have their flaws and could be disputed. Only time tells when a club challenges them.
Part 2 will be published next week...