Financial Fair Play Regulations and Club Behaviour

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1 Financial Fair Play Regulations and Club Behaviour Stephanie Leach UEFA Club Licensing & Financial Fair Play 20 June 2011 Aarhus University

2 Outline Why Financial Fair Play? What are the objectives of Financial Fair Play? How will Financial Fair Play be implemented (when, who)? Who will monitor Financial Fair Play? What are the new rules? How will Financial Fair Play influence club behaviour? Discussion

3 Why is action needed? After 10 years of nearly continuous income growth, losses remain and many balance sheets also weak. Some clubs reporting relatively massive losses; 14% of European clubs had Going Concern emphasis of matter or qualification in 2009 Audit Report; 1.2bn record losses reported by top division clubs in FY2009; Second tier clubs in particular struggling to meet commitments; Longer term investment in football has not matched spending Less than 1 in 4 clubs own stadium and less than 1 in 3 own training facilities; Increasingly difficult for clubs with sustainable business plans to compete with those living beyond their means.

4 How has FFP been developed? Financial situation of European club football stakeholders calling for change; Extensive consultation with all stakeholders (NAs, EPFL, ECA, FIFPro Europe, SD Europe); New financial rules built on top and integrated with existing club licensing regulations in effect since 2004 => UEFA Club Licensing and Financial Fair Play Regulations (Edition 2010); Club Financial Control Panel established in 2009 to monitor compliance with FFP requirements; New regulations approved by UEFA EXCO on May 27th 2010.

5 What are the FFP objectives? Agreed objectives As approved by UEFA s Executive Committee and key stakeholders, the new requirements aim principally to: Introduce more discipline and rationality in club football finances; Encourage clubs to operate on the basis of their own revenues; Protect the integrity and smooth running of the competitions; Encourage investment for the long-term benefit of clubs; Ensure clubs settle their liabilities on a timely basis; Protect the long term viability and sustainability of European club football.

6 Who is concerned by the FFP rules? 1. Break-even requirement : Applies to all clubs with a licence which qualified for a UEFA competition; Exemption from the break-even requirement (Art. 57.2) Clubs with relevant income & relevant expense < 5mio in both T-1 & T-2 Clubs qualified sportingly and granted special permission (article 15) 2. Enhanced overdue payables and 3. Future financial information: Applies to all licensees qualified for a UEFA competition.

7 When will the new rules be implemented? New requirements phased in over three years: Enhanced overdue payables criteria and enhanced future financial information as from June 2011; Break-even rule as from the financial statements of the reporting period ending in 2012 and progressive implementation first assessment will take place as from June/July 2013.

8 Who will monitor the new rules? The Club Financial Control Panel Brian Lomax (ENG) Jacobo Beltrán (ESP) Yves Wehrli (FRA) Egon Frank (GER) Johan Lokhorst (NED) Brian Quinn (SCO) Jean-Luc Dehaene (BEL) Petros Mavroidis (GRE) Umberto Lago (ITA)

9 Who will monitor the new rules? The role of the CFCP In carrying out its tasks the CFC Panel may: Summon clubs and/or licensors to a hearing; Request clubs and/or licensors to provide additional information; Request clubs and/or licensors to meet a specific condition within a set deadline; and If deemed that major findings have arisen from a compliance audit or that the club monitoring criteria have been breached, taking into consideration other information in respect of the club: Refer the case to the UEFA Organs for Administration of Justice, which shall take the appropriate measure(s) without delay in accordance with the procedure defined in the UEFA Disciplinary Regulations for urgent cases.

10 Break-Even Summary of Criterion RELEVANT EXPENSES Cost of Sales Employee benefits expenses Other operating expenses Player transfer amortisation or expense Finance costs Related party transactions below fair value adjusted Infrastructure costs Youth sector expenses Community schemes expenses Finance costs (limited) Non monetary debits/charges RELEVANT REVENUES Revenue: Gate receipts Broadcasting rights Sponsorship & advertising Commercial activities Other operating income Player transfer profit or income Finance income Excess proceeds on disposal of tangible fixed assets Related party transactions above fair value - adjusted Non-football income Non-monetary credits

11 Multi-year assessment Cover at least a period of three years T-2, T-1 and T; Period can be extended to five years (T-3 and T-4); The break-even information of T-2 and T-1 will be drawn from, and reconcile to, the club s audited annual financial statements (as submitted to the licensor for club licensing); If breach any indicator (going concern, negative equity, break-even deficit for either or both of T-1 and T-2, overdue payables as of 30 June), then licensee must also submit break-even information in respect of reporting period T; Aggregate deficit/profit is the sum of the deficit/profit of each year.

12 Notion of Acceptable deviation Maximum aggregate break-even deficit possible to be deemed in compliance with the break-even requirement; Acceptable deviation is 5million; If the acceptable deviation is covered by contributions from equity participants and/or related parties, the acceptable deviation can be up to: Assessment during UEFA season Financial statements taken into account Acceptable Deviation 2013/ (T-1) (T) 5-45M 2014/ (T-2) (T-1) (T) 5-45M 2015/ (T-2) (T-1) (T) 5-30M To be taken into account, the contribution needs to have occurred (not a promise): in one of the relevant reporting periods (T-2, T-1, T) or in the accounting records up to 31 Dec. of the year of the reporting period T

13 Monitoring period First monitoring period: For UEFA competition season 2013/14, assessed in 2013: Reporting period n/a T T 2013 Result in m Aggregate result in m -31 Second monitoring period: For UEFA competition season 2014/15, assessed in 2014: Reporting period T T T 2014 Result in m Aggregate result in m - 53

14 Break-even other factors After an numerical assessment of the break-even result over the monitoring period, the CFCP will, if needed, look at the following other factors in assessing a club Quantum and trend Impact of changes in exchange rates Projected break-even result Budgeting accuracy Debt situation Force majeure Players under contract before June 2010 (for first two monitoring periods)

15 No overdue payables - Enhanced To ensure that clubs settle their liabilities towards: 1. Other football clubs, as a result of transfer activities 2. Employees and social/tax authorities Two new assessment dates in addition to the date for club licensing (31 Mar) 30 June 30 September (if existence of overdue payable at 30 June) Clubs must prepare and submit a supporting document (transfer payables table, employee schedule) in same format/detail as for club licensing

16 No overdue payables - Enhanced For licensing: No overdue payables for obligations arising prior to 31 Dec For monitoring: No overdue payables for obligations arising up to 30 June For monitoring (risk-based): No overdue payables for obligations arising up to 30 Sept 31 Dec Jan Feb 31 Mar Apr May 30 Jun Jul Aug 30 Sep Oct Nov 31 Dec Jan

17 Future financial info - Enhanced Provide a more complete picture for the licensor/cfcp about a club s financial position and future outlook, as part of the multi-dimensional approach. Risk based approach: a club must prepare and submit updated future financial information if it has breached one of the following indicators : Going concern; and/or Negative equity. Overdue payables as of 30 June Updated future financial information comprises an update of the future financial information that was provided for club licensing purposes covering the 12 month period commencing immediately after the closing date of reporting period T (i.e. reporting period T+1) Submission deadline to be communicated by UEFA in due course (e.g. 15 October)

18 How will FFP impact competitions?

19 Does Europe have a competitive balance problem? Depends on the viewpoint, which competition, which country and consumer tastes; Some countries appear highly imbalanced however still draw fans; The UCL and UEL are big attractions now could they attract even more interest; Factors are more varied in Europe with regards to individual government intervention and laws, economic power (TV broadcasting), and player power; Competition structure is more influential;

20 What about FFP and competitive balance? At this early stage and with the complex factors that influence competitive balance it is difficult to say precisely however we can make some conjectures; We briefly outline some potential effects regarding: UEFA club competitions (Champions League/Europa League) European domestic competitions (Premier League, Eredivisie, etc...) National team competitions (e.g. EURO, U-21s, etc)

21 UEFA club competitions Big clubs will remain big clubs (loyalty, history ) and relatively should be able to maintain their spending power and compete for the best talent; However, clubs should reduce their spending (break-even requirements) thus lowering wage inflation: Gives other clubs more opportunity to buy talented players and if talent is more evenly spread out, it may provide more balance to the competitions; The encouragement of infrastructure investment and development of sponsorship opportunities could impact revenue generation and improve club finances for more teams; Question: How do we feel about the potential exclusion of big clubs? Good or bad?

22 European domestic league competitions FFP may also have an impact on domestic leagues if wages and player acquisitions are influenced in the larger clubs; If due to the break-even rule, clubs reduce their spending and dampen player wage inflation what influence might this have: More competitive domestic leagues? Is this desirable? New mix of clubs qualifying for UEFA competitions? Clubs might self-regulate and implicitly reduce squads? Home-trained players may get more opportunities? Clubs might look to lower tiers for players (supporting lower level football)?

23 National team competitions Secondary effects from FFP on national teams may also occur; A reduction in spending might mean more clubs search for players domestically (from academies and lower divisions); Additionally, the encouragement of investment in youth within the FFP Regulations may provide an avenue for improving the national team; The incentive to invest and improve infrastructure should in theory mean more stadia are up to national standard and for countries without national stadia, could provide extra options for the national team;

24 What effects could FFP have on club owners and investors?

25 Types of Owners "There are people buying football clubs for a number of reasons: some people buy them because they can and they want to; some people buy them because it gives them credibility; some people buy them because they want to be associated with a good British asset; some people buy them as a very expensive life insurance policy. But there are many reasons why many wealthy people are pouring money into clubs. Simon Jordan Business Investor Philanthropist Glory Hunter Incognito Keep wages down Make transfer profits Accept small short-term losses for capital appreciation Personal affinity for the club Funds club even though no real returns Well-intentioned To raise political profile To reap power and fame Use as a high-value networking tool Some hide criminal activity (e.g. money laundering) Others use the popularity of the club as a safe harbour from political pressure

26 What are the current options to the owners? Status Quo Clubs could continue as they are wait and see; Clubs could try to succeed with what they have and improve in a rational and budgeted manner; Clubs may also explore new revenue streams and try to improve old ones; Q: Why would owners want to behave rationally and honestly? One set are profit maximisers who want to do well financially but also have a chance to compete sportingly as long as everyone else is not at an additional advantage (Robert Kraft). Others may be risk averse and not want to risk punishment by breaching the rules. Some may even use the rules as an excuse to limit salaries and transfer fees.

27 What are the current options to the owners? Avoidance Owners might try and circumvent the rules (accounting loopholes); Withholding information (asymmetric information); Stalling via courts through probing the interpretation of the rules; Q: Why would owners refuse to abide by the rules? Some may be pure win maximisers and would want to win at all costs, others may believe the punishment is weak or worth the risk. The rewards (champions, power, popularity, etc) may be worth more than any penalty or risk of penalty.

28 What are the current options to the owners? Fight Back Might not believe that UEFA would apply strong sanctions (small fines or warnings); Start a popular campaign to say that the rules are unfair and hurt the club; Challenge via the EU; Mass collusion by clubs to ignore the rules; Q: Why would owners want to fight the rules? They may believe that the current situation is better suited to achieve their objectives (whatever they may be). Some also may know that a certain momentum of clubs must abide by the rules with strong disciplinary sanctions lest a classic prisoners' dilemma develops. Other situations may include caving into fan pressure when sporting results are not good.

29 Would Financial Fair Play deter or encourage new owners? Business Owners May encourage those who would like to run the clubs as businesses where revenues are not depleted by players salaries; Could convince those who want healthy businesses but also a fair chance of winning instead of a Sisyphean effort of competing against oligarchs and sheiks with unlimited funds ( competitive futility ); For these owners it may be that only large market clubs would be worthwhile in that smaller catchment area clubs could not feasibly increase their market share; Not impossible to become a larger club in the global marketplace IF the proper commercial exploitations are aggressive enough and the sporting and development side of the club is efficient.

30 Would Financial Fair Play deter or encourage new owners? Philanthropists/Enthusiasts Influence on fan ownership fans may operate as win maximisers with a budget constraint; One issue is that clubs with millions of fan shareholders may find it difficult to accurately monitor the management board and prevent them from acting against their interest. Also many various shareholders may find it difficult to build a consensus or act as one united force. Philanthropists may be encouraged to invest and build a long-term legacy.

31 Would Financial Fair Play deter or encourage new owners? Glory Hunters May be deterred if they are too restricted in their methods of building up a club; May be more tempted to buy a club that is already successful or popular; Taking a small club and making it successful may require more effort and investment than a popular club however the buying price of the small club may be such that the investor has a lot of room to manoeuvre;

32 Would Financial Fair Play deter or encourage new owners? Incognito Types FFP Regulations may deter these types of owners because the new regulations would add an additional layer of financial scrutiny, exactly the kind of attention they don t want; May only deter these types from investing in relatively larger clubs;

33 Thank you!