Why football cannot ignore Europe’s new rules

FOR those who aspire to be the next Sir Alex Ferguson, the Premier League’s fantasy football game offers the chance to build your own squad on a budget of £100m. Each fantasy manager has equally sized pockets, so the playing field is level. Thus, competition is fierce.

Compare Premier League reality, where the elite maintain their position by snapping up the top players, paying record-breaking transfer fees and high wages. Teams have become an accessory for wealthy individuals such as Roman Abramovich’s Chelsea and Sheikh Mansour bin Zayed Al Nahyan’s Manchester City. For these men money is no object – in 2011 Manchester City announced a record £197m loss, bankrolled by the Sheikh’s cash injection of £800m over three years. This loss eclipsed Chelsea’s £141m in 2005 under Abramovich.

Uefa’s Club Licensing and Financial Fair Play Regulations (FFPRs) were designed to prevent clubs gaining an advantage by trading at a loss. Ultimately, a club may be refused a licence to compete in European competition if it fails to comply.

The basic rule of financial fair play is that a club applying for a Uefa licence must at least break even based on its audited accounts taken on aggregate over the previous three seasons. The requirement will come into force for the 2013/14 season (though, exceptionally, for this season only the previous two seasons’ accounts will be assessed).

Any expenditure on stadium and training ground development, a club’s youth development programme or any community project is excluded from the accounts. This is consistent with one of the key drivers behind the FFPRs, which is to encourage responsible spending with a view to long-term benefit. Expenses and revenues from non-footballing operations, corporation tax and non-monetary items (e.g. revaluations or depreciation of fixed assets) are also excluded. However, any dividend payments to shareholders must be included as an expense.

The FFPRs also allow for a degree of “acceptable deviation” from the break-even requirement. This can be either a deficit of up to €5m (£4m) or, if covered by an equity injection, up to €45m. This will be reduced to €30m as of the 2015/16 season, and to some as yet undetermined lower figure from 2018/19. Where a club’s accounts show a deficit which exceeds the acceptable deviation, it can use any surplus from the two seasons before the period towards the break-even calculation.

Clubs may also take advantage of provisions which state that a club which falls foul of the break-even requirement should not be sanctioned if the club is reporting a positive trend in its over the monitoring period, and it can show that the aggregate deficit is only due to losses sustained during the 2011/12 season, which in turn are due to expenses incurred in connection with contracts with players signed prior to June 2010.

One potential loophole that Uefa has sealed off is the manipulation of a club’s accounts through related party transactions. Under the FFPRs, these transactions must be included in the break-even calculation at fair value, regardless of what was actually paid.

As of June 2011, club accounts which are submitted for assessment as part of a licensing application will also be tested against four indicators of financial health. Licensors may refer a club for further investigation if there is a question mark over whether the club is a “going concern”, its net liabilities have deteriorated in comparison with the previous year, its accounts for that year do not break-even when taken in isolation, or if it has overdue payables towards other clubs, employees or social/tax authorities. If a club fails to satisfy any indicator then it may be required to present more detailed information, including budgeted future financial information. Uefa may also request further information if employee costs (e.g. wages) exceed 70 per cent of revenue, or its net debt exceeds 100 per cent of revenue.

Finally, new licensing criteria with a greater emphasis on financial health have been in force since June 2010. These assess a club’s credibility across five categories – sporting, infrastructure, personnel, legal and financial.

However, the question has been asked – how sharp are the teeth of these rules? The drafting of the FFPRs saw Uefa make significant concessions to the European Club Association. This has caused some to query whether Uefa is prepared and able to enforce the rules should push come to shove.

When it comes to preparedness, it appears that even in their tempered state the FFPRs have sent clubs a message. In November Chelsea announced that it was in the black for the first time under Abramovich’s ownership, claiming profits of £1.4m – the winds of change have started to blow. Chelsea’s financial turnaround should ease concerns that over the next few years Uefa will be faced with a situation where it must either refuse to licence some of Europe’s top clubs, or let its own rules fall by the wayside.

In the event that such a predicament does arise, Uefa has clearly stated that it is committed to the need to improve standards and to the active enforcement of its licensing system, ranging from warnings to disqualification from future competitions.

The independent Club Financial Control Panel is responsible for monitoring clubs’ compliance with the FFPRs and can make referrals to Uefa’s independent disciplinary bodies in the event of a breach. All of the evidence thus far gives little cause to doubt the enforceability of the rules. In September the Panel announced that 23 clubs involved in 2012/13 Uefa competitions have had the payment of their prize money temporarily withheld pending further investigation into overdue payables. Of the 591 clubs which applied for a licence for the 2011/12 season, 101 had their applications rejected for failing to meet the fair play criteria. And Uefa president Michel Platini has said that he intends to take a similarly hard line in respect of exclusions for failing to meet the break-even requirement, arguably the most stringent criterion of all.

One possible threat to Uefa’s good intentions is a legal challenge to the FFPRs on the grounds that they are anti-competitive. Over the summer, unconfirmed rumours suggested that Manchester City were exploring the potential for making a complaint, the substance of which might be that the FFPRs breached EU competition laws prohibiting rules which restrict or distort of competition, specifically by limiting investment (i.e. by club owners).

In order for such a claim to succeed, a club would have to show that by limiting investment in this way the FFPRs will favour larger clubs with strong revenue streams, so entrenching the status quo. Uefa, of course, would argue that the rules do not have this effect at all. To the extent that any anti-competitive effect is made out, Uefa would argue that the rules benefit from the statutory exemption for restrictions, which are ultimately pro-competitive. Arguable pro-competitive benefits include ensuring the integrity of competitions, promoting good governance, safeguarding the financial stability of clubs and leagues, and encouraging investment. To fall within the exemption, Uefa would need to show that the FFPRs are indispensable to attaining these objectives.

A challenge on these grounds has not yet been made, and it is looking increasingly unlikely that one will be. On 21 March Platini and European Commission vice-president Joaquín Almunia issued a joint statement on the matter of financial fair play.

Even if the Commission initiates an investigation into the FFPRs, this will not be an immediately practical solution for disgruntled clubs. The time-frame for such an investigation would mean that any resulting change to the rules would not come quickly enough to allow participation in a season for which a licence has been refused.

Despite the not-insignificant degree of initial resistance to the FFPRs, this November saw a meeting of Premier League clubs to discuss proposals to introduce a domestic version of the rules. Disagreement has resulted in a second meeting being scheduled for February 2013, and no firm proposals in the meantime. Fulham’s chairman, Mohammed al Fayed, is one of the most vocal opponents, and has hinted at mounting a challenge based on EU rules against restraint of trade. Perhaps we are more likely to see a legal challenge to the concept of financial fair play in respect of the nascent domestic proposals – they are significantly more vulnerable in their early stages than the Uefa rules, which openly enjoy the support of the European Commission.

The heat has largely been taken out of the debate, with the majority of clubs and national league associations accepting that financial fair play is here to stay. There are some who would be willing to call Uefa’s bluff on the exclusion of top clubs from its competitions for failing to meet the break-even requirement – Premier League chief executive Richard Scudamore has told the BBC that “Uefa is too sensible, and it’s not in its interests to do so”. However, Uefa has given firm signals that it intends to take a strong stance once the break-even requirement bites in 2013/14.

Barring a successful legal challenge, the only other option open to clubs wishing to dodge the rules is to refrain from applying for a Uefa licence altogether. One concern which has been raised is the possibility of creating a “dual system”, with clubs having to choose between competing in Uefa’s tournaments or in the domestic competitions which still allow members to strengthen their squads through “unfair” financial investment. A club which hitherto has performed well in both may find that the financial restrictions imposed by Uefa hamper its ability to compete in national competitions against sides which are not subject to Uefa regulations. For the 2011/12 season, Chelsea took home a €59.9m payout after beating Bayern Munich in the Champions League final. This is a fair amount less than the £60.6m prize that Premier League champions Manchester City received from the league’s central funds. However, this will not be such a potent issue if domestic leagues adopt their own version of the FFPRs.

Uefa’s objectives are, among others, to improve the financial capability of clubs, to introduce more discipline into club finances, to encourage clubs to operate on the basis of their own revenues and to protect the long-term viability of European club football. By enshrining these objectives in the FFPRs themselves, Uefa has put itself in a position where the rules simply must be enforced in order for the whole exercise not to be a visible failure. Everything we have seen and heard thus far suggests that Uefa will continue to pursue the rules’ rigorous enforcement. Even as sanctions are issued and investigations undertaken in respect of those aspects of the FFPRs already in force, Uefa is bolstering its legal department and making friends in high places at the European Commission to pave the way for successful enforcement of the break-even requirement from 2013/14. Uefa has displayed a level of commitment to the cause which does not bode well for clubs intending to push boundaries.

By Nigel Boardman, partner at Slaughter and May and an adviser to several clubs, and Sally Foreman, trainee solicitor at Slaughter and May