23 April 2012

High level debate on the UEFA Financial Fair Play rules at the College of Europe’s annual football tournament

Exclusive insights from UEFA, the European Commission and Cleary Gottlieb Steen & Hamilton

Exclusive insights from UEFA, the European Commission and Cleary Gottlieb Steen & Hamilton 

Article by Ann Becker and David Carroll 

The College of Europe’s annual football tournament, “The Hendrik Brugmans Memorial Cup,” opened on 19 April with a high level panel discussion on the UEFA Financial Fair Play Rules.  

This year, Hill+Knowlton Strategies continued our sponsorship of the event for a third successive year, thus further aiding the ability of the students of the College if Europe to bring key stakeholders, policy makers and other students together to discuss some of the most relevant issues in EU sports policy.

This debate is timely, not only because of the recent joint statement issued by EU Competition Commissioner Almunia and Michel Platini, President of UEFA, acknowledging that the UEFA rules are consistent with EU state aid policy, but because it illustrates the importance of getting the economic governance of football clubs right at a moment when the EU is facing major economic difficulties.  

Highlights of the debate,  followed by an interview of the panellists

The debate was moderated by Dr. Michel D'HOOGHE (Executive Committee Member at FIFA, Honorary President of Club Brugge and Honorary President of the Belgian Football Association) bringing together Mr. Pedro VELAZQUEZ (Deputy Head of the European Commission’s Sport Unit), Mr. Andrea TRAVERSO (Head of Club Licensing and Financial Fair Play at UEFA), Mr. Ernesto PAOLILLO (Managing Director & CEO of FC Inter Milan) and Mr. Thomas GRAF (Partner at Cleary Gottlieb Steen & Hamilton LLP).

Michel D’Hooghe opened the discussion by noting that the purpose of the debate was to clearly identify the diagnosis and treatment for the financial troubles associated with professional football today. He noted the large number of stakeholders involved in the debate, all playing an important role and wanting to influence the future of football.

Necessary to cut on transfer and salary spending.

Acknowledging that he was representing one of the producers of financial problems in football, the CEO of Inter Milan, Mr Paolillo made it clear that he is entirely in favour of the new rules while recognising that the rules are likely to create side-effects; competition will change, so will the competitiveness of clubs.

When former star striker Samuel Eto’o scored a goal for his club, Mr Paolillo was the only one of 80,000 fans in the stadium not celebrating, as he already begun to think of the bonus triggered by the goal.

The rules are likely not to have the same consequences in all countries, and will perhaps be slightly altered in the future. The problem clearly lays in the inflated salaries of players. Aware of his unpopular status among Inter Milan fans, he feels cutting back on transfer and salary spending to comply with these rules is necessary, as the only way to avoid a crisis in football.

Mr Paolillo believes it is time to do something, but it could even be too late.

Collective losses of clubs of €1.6bn in 2010.

Outlining the objectives of the rules, Andrea Traverso from UEFA shared some shocking figures on the increase in collective losses of European football clubs, figures reaching €1.6bn in 2010 alone, with 65% of clubs competition in European competitions recording annual losses. This despite the fact that revenues of professional football clubs, even in these difficult economic times across Europe, have grown by an average of 9.1% per year over the past 5 years.

While stressing the importance of the long dialogue with stakeholders get to these rules, he agreed that only time will tell whether UEFA have taken the correct decisions or not.  The goal is to ensure that clubs can operate on their own, that they behave “fair”. The rules will also encourage reasonable spending providing long term benefits in infrastructure and youth and protect the integrity of the competitions.

“The rules are necessary to ensure that clubs spend money they have, not money they would like to have in the future” Andrea Traverso

Sanctions will be taken against clubs that have a cumulated deficit below €45 million, ranging from a first warning to the exclusion from future competitions.

Next step is to implement the rules. To do so, UEFA will rely on an IT tool to collect the financial data and provide training.  Currently a pilot with 39 clubs is running. 

UEFA will continue its dialogue with the European Commission as indicated in the recent joint statement.

Regulation needed to sustain in a moment of financial crisis.

From the viewpoint of the European Commission, these rules are the fruit of long discussions, they go in the right direction and respect subsidiarity. While Pedro Velazquez, from the European Commission, noted that in general terms, the Commission would normally be against an approach that limits the freedom to do business but he acknowledged the specificities of football which sometimes require individual treatment. Regulation is needed to sustain in a moment of financial crisis. He referred to the importance of the European Commission in the Financial Fair Play process, with these rules being agreed between stakeholders at the Commission’s 2009 conference on licencing in professional football.

Grey area of financial fair play rules.

Diverting from the emotional and pure sporting perspective of the rules, Thomas Graf, partner at Cleary Gottlieb, injected a more business and legal-minded approach to the debate. He referred to the traditional distinction between pure sporting rules and rules which effect economic activities under EU law, and noted the grey area of the financial fair play rules, in that they are designed to address a sporting issue, but they will also have an effect on the economic environment, such as reduce competition in salaries of players.

While making reference to the fact that sport is not a purely commercial activity, Mr Graf presented a “survival of the fittest” type theory, with the principle that bankruptcy can be a desirable state in business. Referring to the overspending of certain clubs as a form “financial doping”, he concluded by questioning the level of solidarity mechanisms to help smaller clubs compete on an even playing field and wondered whether or not such rules could maintain a status-quo, i.e. with the spending power of big clubs remaining much higher than certain rivals because of bigger stadiums and increased marketing power.  The possibility for small clubs to over-spend in phase 1 and to reach balance in phase 2 would seem limited by the new rules.

“This is a highly specialized area where self-regulation is more likely to produce efficient results than special sector legislation. That said, it will be useful to observe what impact the current UEFA rules will have and whether additional improvements may be required, for example to avoid foreclosing opportunities for smaller clubs and prevent a freezing of current structures.” Thomas Graf

In response to the panellists’ presentations, members of the audience asked about the effect of these rules on other leagues, whether or not clubs have a clearly defined strategy to cut costs, the issue of solidarity mechanisms and collective bargaining, and the potential for a completely revolutionised type of transfer system.

Interview with panellists

To bring more light on the Financial Fair Play Rules, Hill +Knowlton Strategies asked this year’s panellists to answer our questions on what exactly are the benefits of the Financial Fair Play Rules and how will it impact the life of clubs, both big clubs and small and medium sized clubs where transfers sums and player’s wages may be less spectacular. 

European Commission (Mr. Pedro VELAZQUEZ - Deputy Head of Sport Unit)

  • The European Commission has expressed concerns on the on high transfer fees and wages for players, sometimes disproportionate to the economic situation of the club. Will the rules address these concerns and what are the main benefits of these rules in the view of the European Commission?

“Transfer operations are regulated mainly by football governing bodies and national law. These regulations often impose limitations such as the number of transfers per season for the player, the periods when a player can move and the conditions of transfer for younger. Also, the transfer operation has often been associated to the payment of a transfer fee by the new club of registration. One can legitimately wonder about the need of such a particular system which does not exist in the frame of the working relationships in other industries. Even if due account of the specific characteristics of the football industry is taken, transfer operations raise fundamental questions such as: Why, when a professional football player changes employer, compensation or fee must be paid? What do these payments stand for? Are players sold like goods or a service? Why does this system sometimes lead to exorbitant payments? Actually, transfers of players in professional football regularly come to public attention because of concerns about the high level of the payments, the transparency of financial flows involved, the legality of the acts, and the legitimacy of the principles on which the system is based. These are the reasons why the European Commission has launched an overall evaluation of transfer rules in professional sport in Europe insofar as how those rules have a direct impact on the fairness of club team competitions, with the aim of exploring whether EU action is needed in this area. The study is being carried out by an external contractor that is in close contact with football governing bodies, namely FIFA, UEFA and national associations, but also with all football main stakeholders such as the clubs, the leagues, the players and the agents. The results of this independent study are expected by the end of 2012.”

UEFA (Mr. Andrea TRAVERSO - Head of Club Licensing and Financial Fair Play)

  • How will UEFA work to prevent clubs circumventing these rules through inflated sponsorship deals or other creative forms of revenue gathering?

UEFA will work towards gaining a better knowledge of the functioning of clubs, to understand their strategy and legal structures. Legal structures can vary greatly from country to country which adds on to the challenging exercise.

By gaining better knowledge, UEFA hopes to be able to detect any irregularities or trends that could conduct to circumventing of rules. Inflated sponsorship deals are in general possible to detect. Furthermore a very complete and detailed compliance concept has been developed and the compliance work performed in association with our auditors will allow us detecting irregularities.

In order to comply with the rules clubs will need to better manage their cost structure or improve their incomes, e.g. move towards a greater diversification of their activities.

  • Do you fear that rules allowing clubs to spend a percentage of their overall turnover may create a status quo in maintaining the influence of the big clubs, preventing the growth of smaller clubs? Can you ever envisage a scenario where clubs would have a fixed budget limit (as is the case in certain rugby leagues), rather than a percentage of their overall turnover?

This is not really the question as the objective of the rules is to reach financial stability, not to reach financial equality or competitive equality between the clubs. If UEFA were to do nothing the rich clubs would still have greater resources. If the objective would have been to improve competitive balance other means would have been more appropriate.

Provided that clubs will be requested to balance income with costs and since wages represent the biggest cost element, they will be requested to keep their wage bill under control. This can be done in various ways e.g by lowering salary costs and/or limiting the number of players under contract. In this sense FFP actually work already as a soft salary cap.

Furthermore a reduction in the squad size would have the additional benefit to limit playerhoarding and make talents  become available and effordable to other clubs, eventually making them more competitive.

Cleary Gottlieb Steen & Hamilton LLP (Mr. Thomas GRAF – Partner)

  • What role do you feel the private sector (non-sporting) will have to play in the future of financial fair play and more generally, the sustainable financing of sport?

“Private investors and sponsors have an important role to play in the future of financial fair play. The concern that UEFA's Financial Fair Play rules seek to address is that football clubs may overspend on players and thereby threaten their financial viability.  Clubs may be driven to such overspending because they may hope that by incurring short-term losses from signing costly players they can achieve long-term financial gains through on-field successes.  Club owners, investors, and sponsors can help to cut through such a downward spiral by fostering rational and viable business strategies that are based on a long-term, rather than short term, perspective and that focus on achieving durable and sustainable success both on the field and in financial terms. One possible avenue in this regard is to put more emphasis on developing young players and reduce dependency on the “gamble” of player recruitment.”

  • Is there a need for the Commission to monitor the issue of State aid to football clubs more closely, in particular in the wake of the recent comments by a German MEP Elmar Brok (EPP) concerning the potential restructuring of the debts of Real Madrid and FC Barcelona?

“MEP Elmar Brok rightly highlighted the possible application of State aid rules to football clubs. Football clubs are economic undertakings and as such financial support from the State to clubs is subject to State aid rules. In fact, as Vice-President Almunia recently stated:  “Public financial support (state aid) to [football] clubs is [...] likely to distort competition and affect trade between Member States. Such aid is in principle incompatible with the internal market and can only be authorised under strict conditions. Any aid must, furthermore, be notified to the Commission in advance. In fact, very few aid measures to professional football clubs have so far been notified to the Commission. When their finances are not soundly managed and, as a result, football clubs experience financial difficulties, there is a particular risk that public authorities may be tempted to grant state aid.” (Commission press release IP/12/264 of March 21, 2012).  Accordingly, it is important for football clubs to be aware that they may not be able to rely on State aid for financial support or will have to comply with EU State aid rules to qualify for such aid.”

  • Do you feel that these rules go far enough to solve the issues with financing in sport, or are further policy initiatives needed from the EU / national governments?

“Self-regulation (such as the FFPRs adopted by UEFA) in combination with general rules, such as State aid rules, seem to be an appropriate approach to address the issue of financial fair play in football. This is a highly specialized area where self-regulation is more likely to produce efficient results than special sector legislation. That said, it will be useful to observe what impact the current UEFA rules will have and whether additional improvements may be required, for example to avoid foreclosing opportunities for smaller clubs and prevent a freezing of current structures.”


Hill+ Knowlton Strategies analysis

It is evident at this early stage of financial fair play in football that such rules are welcomed by all stakeholders, and seen as a necessity to ensure the long term viability and sustainability of professional football. It is also clear that stakeholders see these rules as a “work in progress,” which will undoubtedly require amendments and fine-tuning as new scenarios and trends arise in European football. For the moment it remains to be seen how UEFA will react if they are faced with the scenario of excluding one of Europe’s biggest clubs from their premier competitions for breach of the rules, leaving stakeholders (and football fans) waiting to see how the practical implementation of the rules will work.

Remarks from both the panellists and audience suggested that there are further issues in professional football which may require closer scrutiny and stakeholder co-operation in the future. Potential conflicts on the horizon include the collective selling of television rights by football leagues, transfers of players under the age of 18 years, and the role of player agents in football.

At any rate the issue of sound financial principles has reached other areas of sport where the amount of money circulating is less important than in football. Recently the Euroleague (basketball) spoke in favour of the UEFA rules, and would consider adopting a similar approach, based on the simple break even rule that you should not spend more than you have.