UEFA’s Executive Committee has approved a set of key regulations as part of the financial fair play concept designed to bring greater stability to European football in the coming years. This should be seen as a step in the right direction. Although the new rules will take nothing away from the financial muscle power of the bigger clubs or will lead to increased competitiveness within the leagues, it should particularly help the long term sustainability of clubs and hence the game.

Many clubs are in difficulties. According to UEFA around 50% of 650 professional football clubs in Europe is losing money each year and 20% is making massive losses, spending 120% of their revenue each year. Not surprisingly salaries are one of the main reasons; a third of the 650 clubs is paying out salaries in excess of 70% of total revenues. Moreover the annual increase in salaries of around 18% is exceeding the rise in revenues of 11%. Clearly this may result in bankruptcies, which could affect other clubs as clubs could no longer be able to pay each other. Examples of clubs in difficulties are popping up each week and hence it is clear that some measures had to be taken. UEFA’s financial fair play plan (FPP) is hence designed to stop reckless spending by clubs and to stop rich benefactors from injecting large amounts of cash, a practice which distorts the transfer market and pushes players’ wages to astronomical levels and has a knock-on effect as other clubs try to keep up.

The new rules……The main new rules that will come into affect can be summarised as follows:

  1. Clubs will only be allowed to enter European competition if their generated revenues — money from sources such as television rights, gate receipts, competition prize money and sponsorship — is equal to or greater than their expenditure. This rule will run into effect for the reporting period ending 2012, whilst the first season that clubs can be banned from European competition will be 2014-15
  2. As of June 1, 2011 clubs will no longer be allowed to owe money to other clubs, players, tax authorities and social service departments.
  3. Provision of future financial information – to ensure clubs can meet their future obligations

…..but some exceptions are allowed. The main ones are:

  1. Clubs will be assessed over 3 seasons and will be allowed a EUR 5mln leeway over that period
  2. Money invested in stadiums and youth development does not count in the expenditure for FFP purposes. The main targets are high wages and high transfer fees.
  3. Sugar daddies are allowed to contribute up to a maximum of 45 million euros for the 2013-14 and 2014-15 seasons together. This will be reduced to 30 million euros for the period covering 2015-16, 2016-17 and 2017-2018

What to think of it?  When analysing this new set of rules, several issues come to mind with mixed implications, unfortunately not all positive. Let’s start with the good news:

–        Improved level playing field for European top clubs. As the rules already are largely in place in France, Germany and Italy and The Netherlands adapted similar rules just this week, the countries to be affected most will be Spain and the UK. This obviously should be seen as good news as it would create an improved level playing field for the European top clubs. Note that it is the Spanish and UK clubs which carry the heaviest debt burdens in Europe; the 18 Premier League clubs combined are for more than EUR 4bln in the red. Also several Spanish clubs faced bankruptcy. The result of these rules will be that the upward spiral in salaries and transfer fees may be broken. To say the least, clubs cannot borrow endlessly to pay high transfer fees as their Profit and Loss accounts would no longer balance as a result of excessive interest payments and amortisation charges on players.

–        Debt is allowed but limited to a certain extent. Although the focus will be clearly on a balanced Profit and Loss account, it does not imply that UEFA will not look at the amount of debt on the books. Although debt is allowed (as it can fund additional growth) a red flag will be raised if net debt (including loans of the owner) exceeds annual turnover. In that case the clubs will be asked for additional information. Again this should prevent clubs to over leverage (for example in a leveraged buy out) and hence to either pay too high salaries or too high transfer fees.  

–        Emphasis on long term structural investments. Long term investments are excluded from these rules, which is again good news. Rather than short term investments in expensive players, long term investments in stadiums and youth development are allowed (interest on loans and depreciation on fixed assets are in that case excluded from the calculations). These investments should contribute in particular to the longer term health of the clubs, i.e bigger capacity, home grown players rather than paying high transfer fees. If sugar daddies mean well, it is in these items where they want to invest in. They do not help the sustainability of clubs with short term investment in players for two reasons. Firstly, when a sugar daddy or benefactor says goodbye to a club, the club is left in shatters and secondly even if they invest in players this does not guarantee success. Remember only a few clubs can run away with the gold, the majority will lose.

–        Lower burden on society. As football is seen as important to local communities, it is no exception that clubs facing bankruptcy obtain financial support from local municipalities. That is a burden on society and is under increased scrutiny. Obviously by sharpening the rules, football should be able to much better hold up its own trousers

–        Unanimous approval of ECA. The European Club Association, representing 137 leading clubs in Europe, has unanimously voted to approve the proposal. That should be seen as a surprise as some of the clubs might suffer from these regulations in the short term. Cynics might suggest that in that case there might be loopholes in these regulations, which brings us to the negatives.

So what should be seen as the bad news behind these regulations?

–        Loopholes creating governance issues. Clearly there will be creative masterminds finding loopholes in the regulations. The more apparent ones such as benefactors paying excessive amounts for sponsoring or lounges in the stadium are easy to counter. UEFA will likely judge at arms length and hence it won’t be easy to use such constructions. However, it seems somewhat less clear when benefactors would provide interest free loans, as interest would clearly not show up in the Profit and Loss account. No doubt there are similar constructions to think of. This means governance and transparency will become of extreme importance, something which will not always come easy.  

–        The rich will still get richer. Under the new rules, there will be few changes as far as the clubs that can spend the most. The clubs with the biggest attendances, sponsorships and media income will still generate the highest revenues and hence be able to pay the highest salaries and attract the best players. Subsequently these clubs are likely to benefit from additional income from the Champions League. As there is a strong correlation between salaries and results in the league, it means the rich clubs will remain on top. No wonder these clubs have agreed to the rule changes.   

–        The new rules will do nothing for the competitiveness intra Europe. The gap between clubs that play in big countries like the UK, Spain and Germany and clubs that play in leagues in smaller countries, is unlikely to disappear given the enormous differences in the level of sponsor money and media income. This means that there will still be no level playing field as far as leagues in countries are concerned. It also implies that in European club competitions like the Champions League clubs from the smaller countries are unlikely to bridge the gap. The only playing field that will be somewhat leveled is hence that of Europe’s top 10 top clubs.  

–        Wage inflation should decline but ticket prices could rise. As UEFA has chosen for a Profit and Loss approach, revenue maximisation might be the name of the game going forward. Generating more revenues means more can be spend on for example wages. This could mean that prices for tickets (albeit that ticketing income is a relative minor source of revenues) could increase.

Although a salary cap for clubs, rather than for individual players (which under European law is likely to be impossible anyway), might have been a better solution, this probably was not acceptable to many of Europe’s top clubs. That’s why UEFA has come up with the current set of rules. Hence the conclusion is that under the current circumstances, this is probably the best possible solution and certainly a step in the right direction. It is not solving all the issues but better than the old system and certainly addressing some of the most pressing issues.

 
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