It was the best of times; it was the worst of times. Charles Dickens certainly didn’t write that sentence regarding European football, but it is the most accurate way to summarize its financial landscape in 2009. The English Premier League had just signed a then-record TV rights deal, and the revenues of Europe’s traditional “Big Five” leagues (England, Spain, Italy, Germany, and France) had doubled from €4.2bn to €8.4bn between 2000 and 2010 (as per a 2011 Deloitte report).
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Football seemed immune to the global financial crisis of the late 2000s, as the spending of top clubs kept rising and investors poured more and more money into the sport. Between 2007 and 2009, club revenue grew nearly 20%, at a time when the growth rate in the same European economies as a whole was around 0.5%.
These figures, however, show only one part of the story. A 2009 UEFA review of the financial health of European clubs showed that more than half of the 655 European clubs surveyed incurred a loss over the previous year. A small percentage of these clubs may have been able to sustain continued losses due to the wealth of their owners, but it was believed that at least 20% of the surveyed clubs were in actual financial distress and in danger of being wound up.
The financial health of most clubs was in such a disastrous state that a 2010 study showed that if football leagues were treated as normal companies, Europe’s top three leagues would be bankrupt in two years. The situation in England was particularly grim, as financial documents for the year 2008-2009 showed that the top-flight owed a collective £3.1 billion in overdrafts, loans, and other borrowings.
La Liga was in a similar situation, with the league’s collective debt in 2010 being estimated at £2.5 billion. Serie A was also a mess, with Internazionale alone showing a cumulative €1.3 billion loss over 16 years in 2010. To be fair, the German and French leagues were in better financial health, as both leagues were subject to some form of domestic financial controls before the pan-European regulations came into existence.
When looking at the state of European club finances as a whole, it became clear that the entire industry was in bad health. As an increasing number of institutions and academics began to raise concerns about the financial health of European football, its regulators (the Union of European Football Associations - UEFA) could hardly stand by and do nothing. Regulations regarding the financial behaviour of clubs were proposed and in the September of 2009, UEFA announced the first iteration of its Financial Fair Play (FFP) rules.
The overarching theme of these rules was to tie club spending to revenues, penalising clubs that failed to do so. Exemptions would be given for investments in stadium facilities, youth development, and infrastructural projects. The regulations were to come into effect from the 2012/13 season onwards, with sanctions and penalties (the most harshest being a ban from European competition) imposed based on the degree to which clubs failed to meet the stipulated requirements.
Despite approval for both the rules and the time frame in which they were to be implemented in 2009, a meeting in March 2010 of the European Club Association (ECA) succeeded in delaying the implementation of the rules until the 2013-14 season. Various other changes were also agreed on. The most significant among these was the alteration to the initial proposal that FFP rules would only apply to clubs with an annual turnover of over €50 million.
Under the new rules, FFP rules would apply to all clubs desirous of participating in European competition.
The most significant among these was the alteration to the initial proposal that FFP rules would only apply to clubs with an annual turnover of over €50 million. Under the new rules, FFP rules would apply to all clubs desirous of participating in European competition.
A beginner’s guide to the FFP Rules
Prior to the start of each football season, any club that believes it may qualify for European competition must apply for a UEFA Club Licence. UEFA may refuse the application for a licence if it believes that the club in question has failed to meet its requirements under the FFP Rules (FFPR). UEFA have stated that they have two main goals that they wish to achieve under these regulations:
- Improving the overall financial health of European club football, and guaranteeing competitive balance in European competitions.
- Regulating clubs’ spending in order to prevent the payment of what it considers inflated wages and transfer fees, as well as minimizing and eventually eradicating the financial losses clubs were assuming.
The idea behind these regulations is to essentially force clubs to exercise “greater discipline and more rational financial behaviour from clubs, and encourage clubs to operate more responsibly by not spending more than they earn while settling their liabilities punctually."
UEFA’s approach to achieve their goals is the imposition of what is called a break-even mandate. While the name would suggest that revenues should be equal to expenses, UEFA have given clubs some leeway in the form of “acceptable deviations” (basically a fixed amount of allowed losses) that can be incurred over a specific time-frame.
UEFA have defined a club’s break-even result as the difference between a club’s relevant income and relevant expenses. Relevant income refers to all revenue streams, player sales and finance income. Relevant expenses cover heads such as cost of sales, employee benefits expenses, and other operating expenses, plus either amortisation or costs of acquiring player registrations, finance costs, and dividends.
It excludes expenses on development, infrastructure, youth and women’s football, as well as tax expenses or certain expenses from non-football operations. The extent of acceptable deviations is reduced over a period of time. The break-even result must be assessed over a monitoring period, which includes financial results for a number of years prior to the season in question. This has been further explained in the table below:
Monitoring period | Number of years | Seasons | Acceptable deviation (losses allowed) |
2013-14 | 2 | 2011-12, 12-13 | €45m (£38m) |
2014-15 | 3 | 2011-12, 12-13, 13-14 | €45m (£38m) |
2015-16 | 3 | 2012-13, 13-14, 14-15 | €30m ((£26m) |
2016-17 | 3 | 2013-14, 14-15, 15-16 | €30m ((£26m) |
2017-18 | 3 | 2014-15, 15-16, 16-17 | €30m (£26m) |
Using the first row as an example, the rules came into effect in the 2013-14 season (the first monitoring period). For first monitoring period, the previous two years’ worth of accounts are used to assess whether a club’s application for the UEFA license will be approved. Therefore a club’s accounts for years 2011-12 and 2012-13 are used to determine the license application.
Similarly, for the remaining monitoring periods, the total losses incurred by the club over a period of three seasons cannot exceed €30m cumulatively. There are proposals to further reduce the acceptable deviations in future monitoring periods.
It’s important to reiterate that the actual profit and loss as reported by clubs in their annual financial statements is not necessarily reflective of their ability to comply with FFPRs, due to the exemptions allowed by UEFA’s rules. For example, in the first monitoring period, Chelsea FC incurred actual losses of nearly £48 million, £10 million over the acceptable deviation amount.
However, many of the expenses that led to these losses were in areas that were exempted from FFP monitoring, such as youth development, infrastructure, and tax expenses. As a result, Chelsea FC had no problems complying with FFPRs over the first monitoring period.
When the rules were initially made public, apprehensions were raised about the ability of clubs to circumvent the break-even mandate through creative accounting methods. Since commercial income is counted as a part of relevant income, a wealthy owner could (in theory, at least), sign a lucrative sponsorship deal with his club to artificially inflate the income that could be reflected in the accounts.
For example, an owner could sign a €100m sponsorship deal between his club and an entity controlled or influenced by him, and this would be reflected in the books and FFP accounts as genuine relevant income, defeating the entire purpose of FFP. Such a practice is referred to as a Related Party Transaction (RPT).
To prevent such practices, UEFA in 2012 constituted the Club Financial Control Board (CFCB), a body with the authority to investigate and adjudicate alleged FFP violations and impose sanctions if and when deemed necessary. One of the powers of the CFCB was to investigate RPTs and determine whether the figures involved represented “fair value”i.e whether the value of the deal is in line with market values of similar deals involving similarly sized clubs and sponsors.
If the CFCB determines that a deal was not of fair value, the revenue for the benefit of calculating a club’s FFP licence application would be valued at a level that UEFA believes to be “fair value”. This has already taken place, in the case of Paris St-Germain and their sponsorship deal with the Qatar Tourism Authority.
UEFA also has allowed for certain exceptions should clubs fail to achieve the break-even requirement. Essentially, failure to meet the requirement can be overlooked assuming the losses are not too large and there is a positive trend in the accounts (i.e less losses year-on-year). The break-even requirement is the most prominent feature of the FFPRs and the one that has received the most coverage and analysis, but there are certain other changes that have also been implemented.
Sanctions for failure to comply
As per UEFA, there are nine possible sanctions that clubs may face:
1. Warning
2. Reprimand
3. Fine
4. Withholding of revenues from a UEFA competition
5. Deduction of points in UEFA competitions
6. Prohibition on registering new players in UEFA competitions
7. Restriction on the number of players that a club may register for participation in UEFA competitions
8. Withdrawal of a title or award
9. Disqualification from competitions in progress and/or exclusion from future competitions
Criticisms and concerns
Financial fair play has come been criticised for a number of reasons and by a number of different institutions. Economists criticised it as being anti-competitive and strengthening the existing status quo of the top European clubs, making it difficult for new clubs to break into top strata of European superclubs. A legal challenge was brought against FFP by the same lawyer who successfully argued the case known as the Bosman ruling.
The European Court of Justice rejected this challenge, but the reason for rejection was on grounds of procedure followed, and not on the merits of the case itself.
There are three main criticisms of FFP:
- FFP prevents financially tumultuous clubs from receiving necessary capital infusions.
- FFP prevents competition in the player market and serves as an American-style salary cap without improving competitive balance.
- FFP cements the existing elite status quo and prevents new clubs from breaking into the top strata of European superclubs, thus reducing competition.
The first point of criticism is a bit superfluous since FFP does not per se prevent owners from injecting capital into a club. It only imposes sanctions if the club is in such a precarious financial situation that the amount of capital needed to be injected is so large that it causes the club to fall foul of the acceptable deviation mark.
The second point of criticism also requires a more nuanced perspective, as FFP does not impose a hard salary cap (a fixed maximum amount that can be spent on wages) as seen most prominently in the National Football and National Hockey Leagues of the USA, or even a luxury tax as seen in Major League Baseball. Instead, FFP creates a soft salary cap for each club, relative to their individual incomes, by virtue of the break-even requirement and acceptable deviations.
Thus, a club with revenues of €100m would have a different salary cap from a club with revenues of €300m. Furthermore, a hard salary cap if regulated appropriately is a good way of improving competitiveness within a sporting league.
The third issue raised seems to be the most fair, as it is difficult (though not impossible, as the current Premier League champions Leicester City will attest) for clubs to break into the elite of European football without large injections of capital. There is a clear correlation between wage bills and success (as seen in many sports, but particularly in football), and while there may be the occasional exception (looking at you again, Leicester City), it is a trend that cannot be ignored.
The case of Chelsea a decade ago when Roman Abramovich spent £150m in his first summer at the club, or Manchester City’s more recent meteoric rise is unlikely to happen with the current rules in place. It is far more difficult for a club to break into Europe’s elite and stay there without continuous sustained investment, which may result in losses for a prolonged period of time.
For example, Chelsea FC recorded their first profit in the Abramovich era after nine years of his ownership. Had FFPRs been in place a decade earlier, the elite group of European superclubs would almost certainly not have included City and Chelsea.
Leicester City may have broken the traditional elite’s stranglehold on the Premier League title last season, but it remains to be seen if they will be able to sustain competition against clubs with significantly more revenue than them (for context, after their PL win, revenues are projected to be around £180m – Manchester United are expected to have a revenue of around £500m).
Results and effects of FFP
At the time of its proposed introduction, UEFA stated that it hoped to achieve the following objectives through FFP:
- Introduce more discipline and rationality in club football finances;
- Decrease pressure on salaries and transfer fees and limit inflationary effect;
- Encourage clubs to compete within their revenues;
- Encourage long-term investments in the youth sector and infrastructure;
- Protect the long-term viability of European club football;
- Ensure clubs settle their liabilities on a timely basis.
Some of these objectives were achieved almost immediately as a result of the implementation of the regulations. In 2013, merely a year after the regulations were introduced, the following conclusions could be observed on the basis of club financial statements for 2012:
After six continuous years of increasing losses, the 2012 financial year resulted in a combined total of €600m reduction in the entire European top flight. For the first time since records began in 2006, revenue growth (6.9%) outpaced wage growth (6.5%). There was also a substantive reduction in overdue payables, which dropped from €57m in 2011 to €30m in 2012 to €9m in summer 2013.
For further context, the January 2012 transfer window was relatively much quieter than 2011 – transfer spending dropped to €393m from the record €613m in January 2011. Only one transfer in that time frame had a value of over €15m, as opposed to nine such transfers in the previous year. On average, transfer activity was 20% lower in January 2012 when compared to the previous three years.
The 2012 summer transfer window showed that a total of €1.75bn had been spent – considerably below the four-year full summer transfer window average of €2.25bn. The winter and summer transfer spending of 2012 was only 75% of the 2008–11 average.
These numbers clearly indicate a movement in the right direction, both in terms of UEFA’s stated aims and the overall financial health of European football. This was further demonstrated in 2015, when new data was made available. As per the data, in 2012, total club losses stood at €1.7bn per year, but had reduced to the €400m-€500m range as of 2015. The total amount of overdue payables across Europe had also reduced by nearly 80%.
Prior to the introduction of FFP, football clubs in England were the stereotypical examples of financial mismanagement. However, based on data available for the year 2014-15, 14 of the 20 Premier League clubs turned a profit, with a record total revenue of £3.4 billion. This was aided by the fact that the Premier League introduced its own form of financial controls in 2013.
The Premier League’s rules are much more lax than UEFA’s are (for context, the acceptable deviation by the PL rules is around £105m over a three-year monitoring period). Nevertheless, in the year before financial controls were introduced, 12 of 20 Premier League clubs showed losses. The financial controls certainly were influential in forcing football clubs to pay more attention to their financial management.
A similar trend was seen in Spain as well. The Spanish Primera Liga also introduced their own domestic financial regulations for the 2013-14 season. Since the introduction of these regulations, the Spanish top-flight has seen its overall debt reduce by €650m in a three-year period. Most significantly for Spanish clubs, the amount of debt, clubs owe to Spain's tax authorities dropped from €634m two years ago to €496m a year ago to the 2016 total of €328m.
The league announced that revenue increased by 12.3% from the previous season. This trend has been observed in other leagues across Europe as well. The German and French leagues have had financial controls well before UEFA proposed pan-European regulations, and as a result of this, their clubs have generally been in better financial health than those in England and Spain.
Thus, looking at the overall trend of financial statements for football clubs across Europe, two things become clear. Firstly, regulatory bodies have woken up to the issue of financial mismanagement in football and have laid down rules to curb practices that might be deemed unsustainable. This includes imposing sanctions for breach of these rules. More than 20 clubs so far have been sanctioned as a result of these practices.
Secondly, clubs have also realised that competent financial management is important to their long-term stability and success, and there must be a clear long-term plan to increase revenues, which in turn allows them to spend more in the pursuit of sporting success.
Looking ahead
FFP seems to be achieving most of the goals that UEFA intentioned when the rules were first proposed. At this point in time, it certainly seems that the rules have been successfully implemented and the data that is available at this point in time certainly suggests that FFP has been a resounding success, in terms of introducing “discipline” in club finances, as well as promoting investment in developmental and infrastructural facilities.
However, there are still issues that need to be ironed out before the regulations can categorically be deemed successful. Despite UEFA declaring that the FFPRs are legally sound, this is certainly not the case as there has been no definitive legal ruling on the actual facts surrounding the issue, and it is certainly possible that a more substantive legal challenge (having met all procedural requirements) will arise in the future.
For the moment, however, FFPRs are binding on clubs aspiring to enter European competition and there have already been a number of clubs sanctioned for failure to comply with these rules. Multiple economists and academics have already pointed out how the FFPRs could be seen to violate competition laws and thus more time is needed before a definitive answer can be given.
However, UEFA have been in touch with the relevant European authorities throughout the drafting process, and claim that the rules are indeed legally sound.
While FFP will certainly succeed in curbing irrational spending, it remains to be seen whether it will improve competitiveness in European competition. Leicester City are always going to be pointed out as an example of the system already working, but it remains to be seen whether they can sustain the success of the 2015-16 season, or if that is merely an exception to prove the rule.
A study by noted football economist Stefan Szymanski indicates that the American-style hard salary cap is actually a more effective method of improving competitiveness, and it also agrees with the notion that the break-even requirement is likely to cement the status quo of the current elite clubs, preventing challenges from teams with outside investors.
In spite of these concerns, what is indeed amply clear is the fact that the financial health of European football as a whole has markedly improved since the implementation of these regulations. European football clubs, in general, are more sustainable and have understood the importance of maximizing all revenue streams so as to remain competitive. It remains to be seen if this trend will continue to improve, but all the signs as of now are certainly pointing in the right direction.
