The Deficiency of Fairness in Financial Fair Play
Published 15 May 2019
This article has been submitted as part of the writing competition, under the category for Professionals to win tickets to the ‘Football Law 2019 - Player Transfers, Agents, Politics and the Business of Football’ in association with Blackstone Chambers on the 22 & 23 May 2019.
This article has not been subject to usual LawInSport Editorial process and the views shared are entirely those of the author.
There are two entries in this category:
- Football- is it time to introduce protection for national associations concerning players with dual-eligibility?
- The Deficiency of Fairness in Financial Fair Play (below)
Please vote and decide which one you think is best.
In the aftermath of the Football Leaks/Der Spiegel revelations concerning Manchester City, a La Liga spokesman announced that should UEFA fail to take effective action to enforce UEFA’s Club Licensing Financial Fair Play Regulations (FFP), the Spanish top-flight would lodge a complaint with the European competition authorities.1 Referring to the recent Court of Arbitration for Sport decision in AC Milan v UEFA,2 and a variety of other sources, this article will examine whether there is any merit to an argument that the manner of the application of FFP distorts competition and as such UEFA are in breach of EU law by abusing its dominant position.3
Financial Fair Play (FFP)
In basic terms, FFP requires clubs eligible for UEFA competition to remain within the parameters of what are considered acceptable annual losses, to ensure no overdue payables occur during the course of a season and to provide future financial information for assessment.4 The allowable annual loss is €5m, though this rises to €30m "if such excess is covered entirely by contributions from equity participants and/or related parties".5
Violations are in large part (at least for first-time violators) dealt with by way of Settlement Agreements.6 Settlements are arrived at on a consensual basis between UEFA’s Club Financial Control Body (‘CFCB’) Investigatory Chamber and clubs, and can include any of the suite of sanctions ordinarily available to the CFCB which range from reprimands to exclusion from UEFA competitions.
FFP & EU Competition Law
The principles of EU competition policy are set down in Article 101 and Article 102 of the Treaty on the Functioning of the European Union. The key decision in the context of sporting rules and EU competition law is that of Meca-Medina.7 The ECJ confirmed the finding in Wouters & Others8 and found that the following must be taken into account when considering the effect rules set out by a regulatory body may have on competition:
The context in which the rule was adopted or produces its effects and objectives;
Whether the restrictions caused by the rule are inherent in the pursuit of its objectives;
The proportionality of the restriction on competition in light of the objectives of the rules.
In other words, sporting rules which would ordinarily breach competition law "can only be justified if shown to be a proportionate response to an inherent need in the sport".9
The objective of the rule is crucial. Despite the common misconception of the public, and quite often the media, the objective of FFP is not to remove inequalities and increase competition in European football. The objectives of FFP are set out in the preamble to the Regulations themselves and can be succinctly stated as measures designed to create financial stability and ensure the sustainability of European club football.
The carefully considered objectives of FFP have been of great assistance to UEFA in securing the support of the European Commission for the initiative. In 2012, the Commission and UEFA issued a joint statement wherein the Commission endorsed the objectives of FFP as compatible with EU law.10 In 2014, the Commission and UEFA signed a "Cooperation Arrangement". The Commission stated that "the Financial Fair Play initiative contributes to the sustainable development and healthy growth of sport in Europe".11 Moreover, when the Arrangement was updated in February of 2018 it was envisaged that both parties would work together to strengthen FFP as a policy which is key to "good corporate governance via self-regulation".12
Thus far no club has broken ranks and sought to challenge the Regulations before the Commission or national/European courts.13 A football agent operating in Belgium, Daniel Striani, did submit a complaint to the Commission. The complaint was rejected as it was felt that the Belgian Court of First Instance was best placed to hear the matter.14The Belgian Courts subsequently refused to rule on the matter (citing a lack of jurisdiction), though a question was referred to the European Court of Justice asking if FFP was incompatible with various TFEU articles including 101 and 102. However, the ECJ refused to deal with the reference on the basis that it was inadmissible on a number of grounds.15
One must remember that, as was spectacularly proven in the Bosman case, the support of the Commission will not prevent the striking down of a sporting regulation by the ECJ for falling foul of EU law. The objectives of FFP may be legitimate but whether they could be achieved in a less restrictive fashion, for example through capital reserves requirements, is a reasonable question.
Yet UEFA appear extremely confident in the legality of FFP.16 Considering the support of the EU institutions and the current reluctance of the actors with appropriate locus standi to take a challenge to the Commission (clubs and club associations), that confidence appears well founded.
FFP SANCTIONS AND EU COMPETTION LAW
By the conclusion of the 2014/15 season, 44 clubs had faced some form of restriction due to breaches of the Regulations.17The sanctions imposed, and the legality of FFP as a whole, have been appealed on occasion to CAS. The findings of the CAS Panel in two major cases are instructive:
Galatasaray v UEFA18
During 2014/15 Galatasaray exceeded the acceptable loss by over €130m, thus breaching FFP and the settlement agreement they had reached with the CFCB. The CFCB Adjudicatory Chamber excluded Galatasaray from UEFA competition for two seasons. Galatasaray appealed the decision to CAS arguing that FFP is illegal under EU Competition law.19The CAS Panel roundly rejected the arguments of Galatasaray and was critical of the club for "relying heavily on press articles" and suggesting "that the main objective of the break-even rule is to impede small clubs" ability to invest and recruit new talented players’.20 It was found that the objective of FFP is as argued by UEFA - to promote financial stability of clubs.
AC Milan v UEFA
The AC Milan decision is both interesting and lengthy. In the interests of brevity, this article will focus solely on the CAS Panel’s analysis of the refusal of the CFCB to offer a Settlement Agreement to Milan.
On 22nd May 2018, the CFCB informed Milan that no settlement would be offered due to the level of the breach of the break-even rule (c. €121m), the submitted business plan not being viable, the dramatic downsizing of expected profits from one business plan submitted to UEFA to the next, and a variety of other concerns related to the refinancing of club debt and the ownership of the club. In June, Milan were barred from UEFA competitions for 2 years.
Amongst Milan’s 13 grounds of appeal, it was argued that the regulatory framework for offering a settlement agreement is incompatible with EU competition law, as the basis on which such a settlement might be offered is unclear and not set out in the Regulations. Dr. Ben Van Rompuy (acting as an expert for Milan) submitted to the Panel that to comply with EU competition law it is essential that "the conditions to be eligible for a settlement agreement are clearly known and explained to the clubs".
The Panel was somewhat dismissive of the point and stated it "cannot follow this line of reasoning".21 It was found that Settlement Agreements and Sanctions are to a large extent interchangeable. It was noted that the Settlement Agreements provided to CAS all contained some form of sanction and that the CFCB was entitled to choose one method of dealing with breaches over another as it deemed appropriate. As "settlement agreements and disciplinary sanctions are two legal instruments serving the same purpose, issued on a similar factual basis and with interchangeable contents"22, it was found there was no requirement to define eligibility for a Settlement Agreement or to restrict the discretion of the CFCB to choose to offer a Settlement Agreement or simply impose a unilateral sanction. The Panel found that, there being no difference between a Settlement Agreement and a unilateral sanction, the question of the legality of how the CFCB may choose to apply one over the other does not arise.
The Panel did however find that the decision of the Adjudicatory Chamber must be overturned as the Adjudicator’s decision was based on out of date facts.23 The matter was referred back to the CFCB for a proportional sanction to be imposed.24
IS THE APPLICATION ILLEGAL?
In light of the Der Spiegel revelations, the manner in which FFP is applied would now appear to be more susceptible to a challenge alleging a breach of EU Competition law. As noted above, it is a weak legal argument which is founded on press reports. This article does not place any reliance on the alleged concerted actions by PSG and Manchester City to deliberately circumvent FFP, or the alleged collusion between UEFA officials and certain clubs to reduce CFCB sanctions. The relevance of the Der Spiegel revelations to this article is simply that they have unquestionably introduced real concerns about the transparency and fairness with which sanctions are applied and that this, combined with the lack of any clear guidance as to when a Settlement Agreement will be offered, could affect a future consideration of FFP’s compliance with EU Competition law.
The finding of the CAS Panel in AC Milan that Settlement Agreements and unilateral sanctions are interchangeable is questionable. At the time of the decision only two clubs who violated FFP had not been offered a Settlement – Dynamo Moscow and AC Milan itself. There is a very simple reason why clubs are keen to avail of Settlements rather than sanctions – they allow a club input into the nature of the sanction to be applied. Yes, a settlement may contain serious sanctions and the now infamous settlements signed by Manchester City and PSG in 2014 both contained a variety of sanctions. However, if a Settlement Agreement procedure is followed then the Investigatory Chamber acts as investigator and mediator and guides the sanction process to some mutually acceptable conclusion. If a unilateral sanction is imposed, the Investigatory Chamber acts as prosecutor and the Adjudicatory Chamber as Judge. The available sanctions may be the same but the method of selection and the impact on violators is entirely different.
In AC Milan the Panel requested the unredacted versions of the Settlements reached with Inter Milan (2015), PSG (2014) and Manchester City (2014) and documentation related to same. In the course of its decision, it was noted by the Panel that UEFA did not fully comply with the order to provide documents and "summarise the Settlement Agreement process it undertook with each of the above referenced clubs…..and confirm if it saw business plans, forecasts etc."25 It was also noted that the Panel could not exclude the possibility that had this information been provided, a finding of unequal treatment might have been made against the CFCB. However, the Panel went on to say that had a finding of unequal treatment in refusing AC Milan a Settlement been made, this would not "render the decision illicit"26 as, for the Panel at least, there is no difference between a Settlement and a unilateral sanction.
If the author’s argument that there is a material difference between a Settlement and a unilateral sanction is accepted, then it would seem to follow that unequal treatment in how UEFA apply the sanctions is a breach of EU competition law.
A Stitch in Time Saves FFP
UEFA’s mission statement provides that the goal of achieving sound finances will be pursued with fairness, transparency and accountability.27 The Regulations state that the CFCB shall ensure "the equal treatment of all licensees" when carrying out its responsibilities.28 The Joint Statement, referenced above, provides that "it will be vital to have uniform standards of equal and non-discriminatory treatment of all football clubs".29The Arrangement for Co-Operation cites transparency as a key factor in the regulatory framework for football.30Both UEFA and the European institutions make it very clear that transparency and equal treatment are key to fair regulations.
The lack of any guidance as to when a club might expect to avail of a Settlement Agreement and what criteria will be applied by the Investigatory Chamber when deciding on this question flies in the face of this commitment to equal treatment. To ensure equal treatment, a uniform set of rules as to when a Settlement Agreement will be offered must be published and applied.
With Der Spiegel having published correspondence indicating that UEFA’s former President Michel Platini and former General Secretary (now President of FIFA) Gianni Infantino sought to navigate a path through the supposedly independent sanction process on behalf of Manchester City and PSG, there are now serious questions around the transparency of how the Regulations are applied. It is conceivable that in the future the Panel may not be so willing to accept the argument of UEFA that a Settlement Agreement and a unilateral sanction are one and the same. If this reversal were to occur then UEFA could not apply a unilateral sanction without first offering a Settlement Agreement.31
A UEFA OWN GOAL?
One must also wonder what the European Commission would make of the matter should a referral on this point be made to it. Would it be willing to allow a situation to continue where UEFA, as the regulator, is allowed to make arbitrary decisions as to the sanction to be imposed for a breach of the Regulations? In its recently published decision in International Skating Union’s (ISU) Eligibility Rules the European Commission was critical of the ISU in finding that "there are no pre-established, clear and transparent criteria as to how the sanctions are to be applied".32This failing contributed to the Commission’s decision that an ISU regulation preventing athletes from participating in events not sanctioned by the ISU was in breach of competition law. To remedy this breach the ISU was directed to take three actions one of which was to "provide for an objective, transparent and non-discriminatory procedure for the adoption and effective review of decisions regarding the ineligibility of skaters".33 The lessons UEFA must take from the decision are clear.
UEFA has expended great effort in establishing a defence based on the objectives of FFP to any potential challenges under EU competition law. UEFA’s own reluctance to define precisely how the Regulations are to be applied may be a real weakness in that defence. UEFA have a potential problem which may well be tested over the next twelve months. It is certainly not beyond possibility that an affected undertaking (perhaps La Liga) may seek to exploit this issue.
Yet the solution appears rather simple. UEFA need only amend Article 15 of the Procedural Rules to properly define the circumstances in which a club may be offered a Settlement Agreement and ensure that these guidelines are applied in a fair and independent manner. Taking such action would create an effective safeguard against at least one potential cause of action seeking to weaken FFP and further reinforce the status of FFP as a justifiable breach of EU Competition law.
By Tomas Nolan, Clark Hill Dublin.
This work was written for and first published on LawInSport.com (unless otherwise stated) and the copyright is owned by LawInSport Ltd. Permission is granted to make digital or hard copies of this work (or part, or abstracts, of it) for personal use provided copies are not made or distributed for profit or commercial advantage, and provided that all copies bear this notice and full citation on the first page (which should include the URL, company name (LawInSport), article title, author name, date of the publication and date of use) of any copies made. Copyright for components of this work owned by parties other than LawInSport must be honoured.