Fair or foul? Competition law and the financial regulation of football - Part 1

Published 10 July 2013 | Authored by: Rhodri Thompson QC, Christopher Brown, Andrew Smith

Leading football clubs are big business – but they are more than that.  Most clubs have strong local roots and they attract huge publicity throughout Europe.  Particularly in the United Kingdom, that has generated huge television revenues and has attracted investors from around the world.  The consequences for spectators and for smaller clubs have caused widespread public concern and has led to calls for regulation of the industry. 

Self-regulation by UEFA and the Premier League is part of the answer but each is itself subject to regulation in the wider public interest. In part 1 of this article, the authors summarise the new measures that UEFA and the Premier League are introducing to protect and/or promote “financial fair play” and in part 2 they sketch the likely legal issues which arise under EU law – whatever the motivation of these reforms of football finance, the history of such initiatives since the landmark Bosman ruling suggests a significant risk that they may be open to legal challenge.

 

Financial fair play?


In just a few months, at the start of the 2013-4 season, the first so-called ‘monitoring period’ of the UEFA Club Licensing and Financial Fair Play (“FFP”) Regulations commences.  Any clubs wishing to participate in UEFA competitions such as the Champions League will have to comply with the FFP Regulations.  The long-promised FFP will, therefore, come of age.

But there are still some who wonder whether FFP is based on solid legal foundations: they openly raise the question whether a court – notably the Court of Justice of the European Union (CJEU) – might strike it down.  Most recently, it has been reported that a Belgian football agent has made a formal complaint to the European Commission about FFP, alleging that the Regulations are in breach of EU law.1

In this article, we summarise the main features of the UEFA and PL regimes and then consider the main grounds for concern that these rules might themselves be ruled unlawful.

 

UEFA Financial Fair Play Regulations

The FFP Regulations entered into force on 1 June 2010, and were updated (following a process of consultation) in 2012.  Since then, clubs wishing to participate in European competition have been on notice that the first official ‘monitoring period’ will begin next season, 2013/14.  Although the Regulations also introduce detailed rules for the licensing of clubs, this article concentrates on their application to the financing of clubs.  

The principal objectives of the FFP Regulations are defined in Art. 2.2 as follows:

a) to improve the economic and financial capability of the clubs, increasing their transparency and credibility;
b) to place the necessary importance on the protection of creditors and to ensure that clubs settle their liabilities with players, social/tax authorities and other clubs punctually;
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.

Michel Platini (UEFA President) has stated that the introduction of the ‘financial fair play concept’:

“…should not be seen as a call for austerity and a return to the budgets of old. Football moves impressive amounts of money and that is a good thing. Nor is it a question of seeking a utopian distribution of wealth. There have always been clubs that are richer than others and there doubtless always will be. All we want is for clubs – richer and poorer alike – to spend no more than they earn and to balance their books, this being the only sure way for them to survive.”

In line with these objections, clubs wishing to participate in European competition are required to comply with various ‘break even requirements’.  A club’s economic performance is to be assessed by analysing ‘relevant’ income and expenditure over a three year reporting period (or, in the case of the 2013/14 season only, a two year period).  For example, the 2014/15 monitoring period will require an assessment of a club’s financial performance for the years 2012, 2013 and 2014.  

The ‘break even’ terminology is somewhat misleading: the Regulations do not in fact require clubs to break even.  For example, a club may make an aggregate loss of up €5m over a three year reporting period, yet remain ‘FFP compliant’ for the monitoring period in question.  This acceptable ‘margin of error’ is termed ‘acceptable deviation’ in the Regulations. In addition, a club may incur much larger aggregate losses (of up to €45m over the relevant two/three year reporting period), provided that the excess is entirely covered by contributions from equity participants and/or related parties.  In short, this further exception to the ‘break even’ rule permits (for example) wealthy club owners to subsidise spiralling wage costs or transfer fees, which would otherwise cause the club to fall foul of the Regulations.  

The intention is that the Regulations will apply more strictly over time: from 2015/16 onwards the permitted level of additional deviation will decrease from €45m (over the relevant three year reporting period) to €30m; and the UEFA Executive Committee reserves the right to introduce more stringent limits in due course.

The UEFA Regulations also restrict the types of income and  expenditure that count for the purpose of the FFP assessment:

  1. ‘Relevant income’ is defined as:
    • revenue from gate receipts;
    • broadcasting rights;
    • sponsorship and advertising;
    • commercial activities and other operating income;
    • profit on disposal of player registrations or income from disposal of player registrations;
    • excess proceeds on disposal of tangible fixed assets;
    • finance income.
  2. Relevant expenses’ are defined as:
    • cost of sales;
    • employee benefits expenses;
    • other operating expenses;
    • amortisation or costs of acquiring player registrations;
    • finance costs;
    • dividends.
  3. Specific (and potentially very important) ‘carve outs’ from the definition of ‘Relevant expenses’ are:
    • depreciation/impairment of tangible fixed assets;
    • amortisation/impairment of intangible fixed assets (other than player registrations);
    • expenditure on youth development activities;
    • expenditure on community development activities,
    • any other non-monetary items;
    • finance costs directly attributable to the construction of tangible fixed assets;
    • tax expenses;
    • certain expenses from non-football operations.

It seems inevitable that these rules and exceptions will give rise to complicated legal and/or factual issues  as to the proper classification of certain types of club income / expenditure, when undertaking the ‘break even’ analysis.  For example, there is obvious cause for concern that a regime of this kind will lead to elaborate ‘avoidance schemes’ designed to sidestep the Regulations, for example by entering into lucrative sponsorship contracts with companies / organisations closely affiliated to the club / the club’s owners; and which do not represent a fair market value for the commercial transaction in question.  

In order to try and address these concerns, the Regulations expressly incorporate the concept of ‘fair value’, by which any ‘related party’ transaction must be assessed.  Again, given the sums at issue in this industry, it seems inevitable that disputes will arise regarding (a) who / what constitutes a ‘related party’ (for the purpose of a particular financial transaction(s)); and (b) what constitutes a ‘fair value’ for a deal between related parties.  There are already cases (for example, ground or shirt sponsorship deals) that raise precisely this type of issue.2          

The responsibility of monitoring clubs’ financial performance against the requirements of the Regulations has been assigned to the ‘Club Financial Control Panel’.  The Regulations do not themselves lay down any specific forms of punishment, or ‘tariffs’ for certain types of offending behaviour, but Art. 72 provides that: “Any breach of these regulations may be penalised by UEFA in accordance with the Procedural rules governing the UEFA Club Financial Control Body”.  Art. 21 of these ‘Procedural rules’ provides that the following disciplinary measures may be imposed against  a club:

a) warning;
b) reprimand;
c) fine;
d) deduction of points;
e) withholding of revenues from a UEFA competition;
f) prohibition on registering new players in UEFA competitions;
g) restriction on the number of players that a club may register for participation in UEFA competitions;
h) disqualification from competitions in progress and/or exclusion from future competitions;
i) withdrawal of a title or award.

 

FA Premier League Financial Fair Play Regulations

On 11 April 2013, a majority of the FAPL clubs ratified the FAPL’s own FFP Regulations.  The Regulations are similar in structure to the UEFA Regulations:

  • each monitoring period will require an assessment of a club’s financial performance over a three year period; and  
  • the ‘break even’ description is somewhat of a misnomer.

 

Under the FAPL Regulations, clubs will be permitted:

  • to make an aggregate loss of £15m over a three year reporting period (i.e. the acceptable deviation, which need not be guaranteed by a club’s owners);
  • make an aggregate loss of £105m over a three year reporting period if:

a) the club’s owners guarantee the funding;
b) the club provides satisfactory financial forecasting projections to the PL; and
c) £90m of the ‘deficit’ funding is injected into the club by way of equity (shares).

 

These limits are substantially higher than the respective maximum deficits of €5 and €45m stipulated by the UEFA Regulations.

The Regulations also include what has been referred to as a ‘soft salary cap’.  Whilst the practical implementation of this measure may be far from straightforward, in essence the position is as follows: clubs whose annual wage bill is £52m or above will only be permitted to increase their salaries by an accumulative £4m per season for each of the next three years.  However, this rule on capped salary increases applies specifically to the clubs’ respective shares of ‘Premier League Central Fund Revenue’ (most significantly, the recent £5.5 billion TV broadcasting rights package); and wage bills may be supplemented beyond these limits if clubs can demonstrate that those payments are funded by other additional revenue streams.  The effect of this rule is clearly much less onerous for clubs with large income streams from non-TV rights sources, i.e. the clubs with large grounds and fan bases, than for small clubs that are heavily dependent on TV revenues to finance their businesses.

In the second part of this article, the authors discuss the possible avenues of legal challenge to FFP under EU law


1 Guardian, “Players’ agent launches legal threat to Uefa financial fair play rules”, 6 May 2013: https://www.guardian.co.uk/football/2013/may/06/agent-legal-threat-uefa-financial-fair-play
2 See, e.g., https://www.financialfairplay.co.uk/latest-news/paris-st-germain-attempt-to-circumvent-ffp-rules:  “Paris St-Germain have signed a huge sponsorship deal with the Qatar Tourist Authority. The four-year deal is said to be worth €150m this season, rising to €200m in the final year of the arrangement. The deal is also reported to be back-dated so that the club will receive the full €150m this season, even though deal has only just been announced.  PSG are 100% owned by the Qatar Sports Initiative (QSI), which is in turn owned by the Qatar Investment Authority (QIA) – a Sovereign Wealth Fund owned by the Qatar government. … The Qatar Tourist Authority is a government funded organisation. This sponsorship deal has clearly been arranged to artificially boost the profits of PSG so that the club can comply with FFP rules. PSG are heavy spenders and without the huge deal would fail the FFP test in the first Monitoring Period.

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About the Author

Rhodri Thompson QC

Rhodri Thompson QC

+44 (0)20 7404 3447

Rhodri is a specialist silk in EU and competition law, appearing regularly in the CAT, UK and EU Courts.  He has advised a wide range of sports and media organizations on issues arising out of the Bosman ruling and competition law, including the BBC, the Premier League, the lawn tennis governing bodies and football, cricket and rugby union clubs and players.  He is currently acting for Coventry City FC in a judicial review of the local council in respect of the Ricoh stadium, Coventry.

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Christopher Brown

Christopher Brown

Christopher Brown is a barrister at Matrix Chambers in London.  His practice focuses on competition law and general EU law; he also has experience of general commercial, public and human rights law.

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Andrew Smith

Andrew Smith

Andrew is a barrister practising from Matrix Chambers in London. He is an employment law specialist, and has a keen interest in sports law and sport generally. His Matrix profile (including Directory recommendations) may be viewed here.

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