Financial Fair Play: Will It Work?

As a football fan I have heard a lot about UEFA’s Financial Fair Play initiative (FFP) but only really in soundbites and have never previously taken the time to find out what it really is. And most importantly; will it work? Will it actually force football clubs across Europe to live within their means and will it create a more level playing field?

For those interested in really understanding the intricacies of FFP I recommend the excellent www.financialfairplay.co.uk or you can even look at the original UEFA document on www.uefa.com although that is a somewhat convoluted read!

This blog will give my answers to the questions that I asked myself and which I suspect are being asked by many other fans.

Q1. What are UEFA trying to do?

It is worth starting with the stated objectivesof FFP which is to achieve financial fair play in UEFA club competitions. There are six specific points within this of which the most pertinent four (to me) are copied below from the UEFA document:

c) to introduce more discipline and rationality in club football finances; 

d) to encourage clubs to operate on the basis of their own revenues;

e) to encourage responsible spending for the long-term benefit of football;

f) to protect the long-term viability and sustainability of European club football.

“Operate on the basis of their own revenues” is EUFA speak for living within your means and is the part of FFP that most attention focuses on.

Notice that there is no objective around creating a more level playing field. Nothing in FFP attempts to harmonise revenue or spending power. It merely seeks to align spending to revenue so there will still be poor clubs, rich clubs and very, very rich clubs. Success will still be heavily determined by the amount a club can spend.

UEFA are trying to reduce the risk of football going bust because of this link.

Q2. What does “living within your means” actually mean?

FFP talks about “allowable deficits” which means the amount a club can lose and that amount reduces over time but does not get to zero. In a normal business a profit or loss is simply revenue minus expenditure; inevitably FFP is more complex than this. We will need to get used to headline losses (as reported to the City for example) and FFP deficits – they will be different. And headline losses will be for a season whereas FFP has “monitoring periods” – covering 2 seasons initially and 3 seasons thereafter.

There are two key permanent exclusions from expenditure and one temporary one.

The costs associated with a) stadium development and b) youth programmes are permanently excluded from the calculation. Loopholes? Possibly but remember that UEFA’s objectives for FFP include one about encouraging responsible spending for the long term development of football. UEFA want improved stadiums and want young players developed. And so do fans.

The temporary exclusion applies for this season only (but confusingly this season counts in two monitoring periods) and is for the wages of players signed before 1 June 2010. This affects wages only (not transfer fees) and is for one season only – it is one of a series of measures that are intended to smooth the pain of introduction.

Q3 How much can you lose and still comply with FFP?

Unfortunately there is not a single amount for us to commit to memory here!

Each monitoring period has a different amount (the allowable loss reduces over time) so lets use the first period as an example. That first period covers two seasons; 2011/12 and 2012/13.

A club will comply with FFP if either:

a) the combined allowable loss over these two seasons is E5m (approx £4m)

or

b) the combined allowable loss over these two seasons is E45m (approx £36m) and equity (cash) is injected into the club that reduces the loss to E5m. A loan to the club is not equity.

In subsequent monitoring periods (all 3 seasons long) there are three things to note:

a)  the E5m allowable loss remains in force

b) the allowable loss that can be covered by an equity injection reduces to E30m (approx £24m) from the third monitoring period

c)  there is an additional requirement for the allowable loss to be reducing.

 So if you really want to hold a single amount in your head the best one is probably E45m for the season 2011/12 and 2012/13 combined – but remember the caveats!!

Q4 How do transfer fees affect this?

Under FFP the transfer fee is spread over the length of the players contract – something known as amortisation or depreciation in accounting speak – and is a cost. So a £20m transfer fee for a player on a 5 year contract will cost the club £4m a season under FFP.

When a club sells a player the amount received is compared against the depreciated value of the player and could generate a profit or a loss.  So our £20m player on a 5 year contract has a value of £16m after one year. If he is sold for £10m that will be a loss of £6m under FFP .

Q5 When does FFP start?

In one sense it already has. The first monitoring period has started and ends at the end of the 2012/13 season but the first season that is affected by the results of the monitoring is not until 2014/15.

Clubs need a UEFA license to take part in EUFA competitions so in theory they need to comply with FFP to get a license for 2014/15.

Q6 What happens if a club fails the FFP test?

Good question and this is at the heart of the FFP concern for many. UEFA has recently published a series of potential punishments which have been ratified by the UEFA conference – 8 in total.

1.     Warning or reprimand

2.     Fine

3.     Deduction of points

4.     Withholding of revenue from UEFA competition

5.     Prevented from registering new players for UEFA competitions

6.     A restriction on the number of players that can be registered for UEFA competitions

7.     Disqualification from a competition in progress

8.     Exclusion from future competitions

A broad and powerful range of sanctions but what is not defined is how they will be applied. There is no published detail on the punishment that will be applied in a given circumstance. The UEFA disciplinary process will determine the punishment.

The absence of clear guidelines (so far) will feed the concern of many that FFP will be a well intended but ultimately toothless. Will UEFA really hit clubs who fail FFP hard or will they just get a slap on the wrist? Will the punishments start soft and get harder over time? Will punishments increase for serial offenders?

To be fair to UEFA the punishment list was only published in April so they may be working on the guidelines for applying them. I hope so!

Q7 So Will FFP work?

I am just a football fan but my conclusion is that FFP could work. UEFA have put in place a very comprehensive set of regulations, incorporated them into their licensing arrangements, invested a lot of political capital in FFP, created a long list of potential punishments and the impact of FFP is already been felt across football (but not everywhere). Some clubs behaviour can make you think they have found a loophole or don’t believe the sanctions will be punitive (you know who you are) because it is really hard to see how they can comply in the first (or second) monitoring period.

Whether it does work or not depends upon 3 things:

1.     Whether the first punishments handed out are material enough to have an impact.

2.     Whether clubs can find creative ways through the regulations – the rules try and prevent this but…..

3.     Whether clubs who fall foul of 1 or 2 accept their fate or resort to legal challenges that undermine FFP.

As I said at the outset, this is not an exhaustive description of FFP. Its just the musings of a fan hoping it works and trying to understand it. If its helpful and there are other questions you’d like me to try and answer please let me know.