Financial Fair Play Rules: A brief explanation

With the transfer window closing on 31 January, we thought it an appropriate opportunity to provide a very brief explanation of UEFA’s Financial Fair Play Rules. With Manchester United recently breaking their club record transfer fee for the purchase of Juan Mata, it would be easy to say that clubs are laughing in the face of these rules. However, as will hopefully be explained below, this is not necessarily the case. Although a full explanation of the requirements is far beyond the scope of this blog, a brief summary of the main points should hopefully provide you with a basic understanding of what are an extremely complex set of rules. For the purposes of brevity, we will concentrate on how the rules will affect Premiership clubs. Please note that although the rules set out financial limits in Euros these have been converted to Sterling.

In a nutshell, clubs are now required to comply with UEFA’s Financial Fair Play Rules. Non-compliance may result in a sanction ranging from a warning all the way up to a large fine and expulsion from UEFA competitions, although we will discuss more on this later. The intention behind these rules is to ensure that football clubs are run like a business, and that any club reporting substantial regular financial losses should be punished. However, as has been widely reported in the press, the matter is not as straightforward as it might initially seem. There are various factors which need to be taken into consideration when looking at whether a club is deemed to have reported a loss in accordance with the rules. Additionally, the rules themselves cover much more than just the requirement to break-even, including paying players on time and keeping up-to-date with taxes. However, it is the break-even requirement which is likely to pose the most concern to premiership clubs, therefore we will concentrate on this.

After an easing in period, when wages for players signed before 1 June 2010 were excluded from financial records and permitted losses were set relatively high, we are now in the middle of the first ‘proper’ accounting period, which runs over 3 years. UEFA felt it unfair to assess a club’s break-even results over 1 year therefore they look at a 3 year average. Over this 3 year period clubs are required to demonstrate that they have complied with the rules. However, as will be discussed below this doesn’t actually mean that they have to show that they haven’t made a financial loss.

The first slightly confusing area relates to the fact that clubs are allowed a permitted level of loss (yes, you did read that correctly). Although this is set at £4.1 million per single monitoring period, this permitted loss is greatly increased (up to £24.7 million) if the owner converts this loss to equity. In other words, if a club are due to breach the threshold, then the owner is forced to inject up to £20.6 million of their own cash into the club. It goes without saying that this is something that will greatly benefit the wealthiest owners, who will almost certainly be looking to take full advantage of this exception, at least in the short-term.

Additionally, there are various expenses which are completely excluded from the reports. For instance, infrastructure development, youth development and community development costs are all excluded. UEFA has stated that the reason for this is that it does not want the rules to affect development in the game. Although this is likely to be one outcome, the wealthiest clubs have stated that they are hoping to be able to exclude up to £10 million using these exceptions.

As is evidenced with the recent transfer of Juan Mata from Chelsea to their rivals Manchester United, a transfer that, arguably, would not have taken place if Chelsea did not have one eye on the financial fair play requirements, clubs are certainly conscious of adhering to the rules, or at least appearing to. What is more telling however are the recent accounts for Manchester City from Deloitte for 2012/2013. These show a huge 31% increase in commercial income, from £121.1 million to £158.2 million, in a season where the only major deal was a kit deal worth an estimated £12 million. This deal was the largest in this year by some margin. To put this income stream into context, in 2009/2010 the clubs entire commercial income was less than £55 million. The result of this huge increase is that the club are most likely to be within touching distance of complying with the break-even rules. However, this is before any assessment of a transaction from a ‘related part’ is investigated by UEFA.

Under this provision, any transaction with a company or body connected to the clubs owners can be investigated and the value decreased if it is found to be at an inflated value. As I am sure you can imagine, investigations into these transactions are likely to be extremely complicated and difficult to prove. In 2011/2012 Manchester City reported that they received £12.8 million from the owners for ‘Intellectual Property and Knowhow’, it goes without saying that this will probably not be the last one-off items in clubs accounts for large amounts.

Having taken all of the above into consideration, it is clear to see that the argument as to the effectiveness of the Financial Fair Play Rules is still in its infancy. With so many loopholes it remains to be seen how much of a change the rules will have on how the game is run. Linked to this is the fact that we are yet to see what punishments UEFA will impose for breaches. If word coming out of the organisation is to be believed, then clubs will be excluded from European competitions for failing to comply. However, the jury is out on whether this threat will be followed up on. Additionally (and perhaps more importantly) in the background is the legal challenge to the laws themselves on the basis that they breach EU rules on competition and free movement. Although that is a blog for another day………

 

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