Friday, September 28, 2012

UEFA Financial Fair Play Explained for us Fans

This week on the du Nord Futbol Show podcast we tried (not very hard) to discuss UEFA's Financial Fair Play policy, but stopped ourselves knowing that there are people out there who can actually explain this like a pro.

So we turned to our Friend In Football Dave Laidig to give us a better understanding of how FFP works.

UEFA is trying to set a minimum standard for all their club teams in an effort to slow down the insane spending, decrease the debt build up, and level the playing field (on the actual field of play) for traditionally smaller teams.

Laidig writes it so us dummies can get a better grip on it.



I have been asked to explain the Financial Fair Play (FFP) system in place for European club competitions. Many of you will, no doubt, liken this endeavor to explaining quantum physics or how Lyle Lovett gets dates. But a brief review of the main points will add context to the dire warnings from the media, and provide insight on trends in team transfer policies.

Power Structure

First, it is important to know that these regulations are passed down by UEFA, and only applies to the European club competitions. While some of the national federations may administer the rules, the ultimate responsibility lies with UEFA. And while UEFA cannot mandate that any team complies with its financial standards, UEFA does control who gets to play in the lucrative Champions League and Europa Leagues. And with payouts up to $72 Million, such as when Chelsea won the Champion’s League last year, teams from across Europe would like to compete in these tournaments (and by that I mean cash in). Thus, UEFA makes teams comply with these regulations by waiving the carrot of playing in the European competitions, and the financial rewards that entails.

FFP Goals

And UEFA has legitimate reasons for imposing financial regulations; (1) stopping runaway debt for teams and thereby minimizing bankruptcies by teams, and (2) discouraging teams from artificially bidding up player prices. A 2010 UEFA report covering European professional soccer teams showed that nearly 3 out of every 10 clubs spent 120% of their revenue. And about 13% of auditors were concerned about whether the teams would continue under their financial stress. For a concrete example of soccer debt, Manchester United had an impressive $538 Million in revenue last year, but still has an overall debt to equity ratio of 1.8. Other teams without the same worldwide following, such as Portsmouth and Rangers, end up in administration (bankruptcy) which ends up hurting the entire league.

The largest sources of teams’ debt are transfer fees and player salaries. Thus, FFP also acts like an international salary-cap by driving down what a team can pay for a player. Instead of imposing a strict player salary limit - as in US sports leagues - UEFA ties its limit to the team’s revenue. And they enforce it through contract (i.e., condition for seeking admission to Euro league) instead of through a collective bargaining agreement or government imposed limit.

Financial Requirements

The FFP requirements are fairly simple in principle. First, teams must have paid their debts to other teams. And this really means teams need to pay up for transfer fees. Second, teams must pay their players and staff. Finally, there is the “break-even” requirement, which is getting the most press. For this requirement, the senior team needs to have revenues that equal expenses – usually reported in an expense to revenues ratio. In other words, a team shouldn’t spend more than it makes.

That’s it for FFP. It’s simple, at least until one gets into the details. For example, the revenue versus expenses ratio is evaluated over a period of years, and there is a host of rules about which revenue and which expenses are considered in the calculation (e.g., youth academies are excluded). The accounting language leads one to believe there are loopholes if only teams look hard enough (or pay their accountants enough). And the teams have a few years to get the books in order before FFP rules become enforceable. Further, teams that have expenses exceeding their revenues may still be allowed to participate in European competition if they are "making progress." There are exceptions for some contracts signed before June 2010. And some cash infusion by sugar-daddy owners is permitted to offset debt. If all this has not caused a migraine yet, the earliest that a team could be required to actually break-even is the 2018/2019 season. Clearly, the sports lawyers are getting rich of these regulations (but somehow I am not – oh yeah, I’m in the US).

Consequences and Trends

Enforcement of the FFP rules has already begun. Recently, some teams had their European prize money withheld for failing to pay their transfer and wage debts. The high-publicity break-even requirement will kick in for the 2013/2014 Euro competitions, based on financial statements going back to 2011. Failure to comply may result in exclusion from European play as early as 2014/2015 (technically, the refusal to issue a license to play in the European competitions). And avoiding the potential license denial is obviously important for teams wishing to challenge in UEFA competitions, and earn the associated paydays.

Clubs have already adjusted their spending habits to accommodate the FFP rules. AC Milan sold Ibrahimovic and Thiago Silva without spending much to replace them. In addition to cutting expenses, the use of “creative” methods to increase revenues is on the rise. For example, Manchester City will have some explanations due to its unusually sweet shirt and campus endorsement deal. The sponsoring company is Etihad Airlines, which happens to be controlled by the half-brothers of the Man City owner, Sheik Mansour. Some competing English Clubs have argued that the deal is not representative of the actual market value, and is, in fact, an impermissible owner contribution. We can expect the bitter, beer-induced refrains of “they bought the cup” to morph into refrains of “their accountants cheated their way to the Cup.” And the news will report more head-scratching “football-related” business ventures for teams, with fans of opposing teams offering their own take of Enron-like financial maneuvering.

An additional layer on top of all of this is whether UEFA would seriously consider excluding a popular club from the Champions League. Some just don’t think UEFA would tell Real Madrid or Chelsea to stay home if they failed to comply with the financial requirements. Whether the rules will be enforced, or devolve back into the status quo of a few teams spending wildly pushing the minnows trying to compete, drama and entertainment will surely follow. And in the end, isn’t sport meant to entertain us.

(edited 9-28-12 11:20am CT)


Anonymous Neal said...

Thank you, Brucio, for finding someone to explain in simple language the FFB.

And thank you, Dave Laidig, for your easy to understand and concise outline.

Yet another reason to:


7:58 PM  
Blogger Graham said...

Thank you for the wonderful explanation.

10:11 AM  

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