Over the last couple of months UEFA has been releasing the details of their new Financial Stability and Club Licensing Regulations (FSCLR) to replace the Financial Fair Play rules that were killed by the pandemic. We will have a look at the content and potential impact of the new rules, but first a short evaluation of the purpose and effectiveness of the now defunct FFP rules is in order.
To understand just what UEFA is trying to do with the FSCLR we need to understand what they were trying to do with FFP, and what worked or did not work under that scheme.
It’s important to remember just what FFP was designed to do. While fans, quite rightly, were focused on the impact of FFP on competitiveness, the plan was not put in place to address competitiveness issues. FFP was designed to prevent teams spending themselves into oblivion. When passed a large number of teams across Europe were spending money like water to compete and taking on unsustainable debt to do so. Teams were technically involvement and approaching bankruptcy. UEFA passed a set of rules to protect unwise owners from themselves and make club finances sustainable. On this front, the plan worked, with very few teams today, barely a decade later, drowning in unsustainable debt.
However, FFP has had an impact on competitiveness, probably as an unintended consequence of its structure. As some teams were looking at how the new FFP rules would force them to stop borrowing, other teams were looking for ways to use it to their competitive advantage or skirt the rules altogether. While there is still plenty of debate on the issue many argue that FFP has given the richest clubs, particularly those who can draw upon outside friendly funding significant competitive advantage. FSCLR tries to deal with both issues, reducing unfair competitive advantage while forcing teams to be fiscally prudent.
How it works
At a recent meeting in Vienna UEFA explained that the program that three key pillars; solvency, stability and cost control.
Solvency is pretty straightforward. It just means that clubs will not be allowed to have unpaid receivables of certain types, such as to tax authorities, employees or other clubs. This has been the case in Germany for quite some time, and also was in place under FFP, but the rules have been tightened, with stiffer, automatic penalties now put in place.
Cost control is perhaps the most interesting piece. The new regulations require a club to limit their “squad costs” (defined as transfers, player salaries and agent fees) to 70% of their revenue. If the 70% sounds familiar it is because for over a decade now financial experts have suggested that the optimal squad cost for financial health is between 60-70% of revenue. So, once again UEFA is legislating economic common sense that owners just can’t seem to impose on themselves (looking at you English Championship).
The stability portion seems to relate to new balance sheet and debt reduction rules. Despite calling for stability the rules actually allow for clubs to incur more losses than under FFP. Under FFP a solvent club was allowed to lose 30 million over three years and this has now been increased to 60 million over three years under FSCLR. A “financially sound” club will be allowed to lose a further ten million over that same period.
The complete set of enforcement rules has not been passed yet. However they have approved punishments including fines, point deductions and squad deductions. There is also talk of teams who breech the rules being “relegated” from one European competition to a lower one, but that has not yet been improved.
UEFA also wants to deliver much swifter justice. They are going to beef up the investigation and enforcement resources and the public goal is to cut the time between detection of an irregularly to punishment down to 90 days. This is a commendable goal as these sagas dragging on forever is not good for the sport.
Fair value and related party transactions
Now this gets a bit wonky, but bear with us it is important.
Under FFP only related party transactions were scrutinized to see if they were fair market value (FMV). Under FSCLR all transactions can be scrutinized to make sure the accounting figures are in line with FMV. This should eliminate two kinds of “cheats.”
The first was teams booking players in swaps at lower than FMV to cook the books. IT works like this. Say you swap a player (with or without cash) for a player from a club. In order to help comply with FFP rules you could jigger around the value of the player to create substantial FFP profit when only a small amount of cash, or no cash changed hands. This Forbes article explains how FC Barcelona and Juventus used this scheme to their mutual benefit. This new FMV rule should eliminate this issue.
The second example was a tad more insidious. Under FFP let’s say you are a state owned club and the state also owned an airline. Because the state owned the airline and the club they were related parties and the state could not use the airline to pump money into the club by paying inflated amounts for sponsorships because as related parties the deal had to meet the FMV rule. But what the stat could do was reach out to other parties who it was not formally related to and cajole/pressure/bribe them into paying well over FMV for sponsorships and advertising opportunities. By eliminating the related party requirement for FMV analysis FSCLR should help eliminate this abuse.
The new scheme will come into force on June 30th of this year, but it is coming into play in stages over a three year period to allow clubs to adjust their business practices into compliance. You may well see some pretty creative deals going down (commercial and player) in the first two years as clubs try to eat as much as they can from non-football troughs while they still can.
Who wins under FSLCR?
It is hard to predict how these rules will make an impact in such early days. They should help iron out some of the problems with FFP on the competitiveness side. However one can never underestimate the creativity of teams to get around rules when it is to their advantage. You can also expect to see deep-pocketed try to pour in as much money as they can before they are fully in force, to “prime the pump” for several years like some clubs did when they knew FFP was coming.
While many pundits remain on the fence on FSCLR’s potential, at least one, Dr. Erkut Sogut, a German player agent with a doctorate in Sports Law sees hope for improvement. On the perception that FFP previously favoured the big clubs he opines:
UEFA aims to overcome this issue. They have ensured that the FSCLR is reinforced by progressive sanctions. In other words, sanctions are proportionate to the financial situation of the offending club and multiple, repeated offences receive a progressively increasing financial penalty. Furthermore, the ability to demote large clubs from the Champions League into a lesser competition should be enough to discourage these clubs from manipulating the system.
All football observers will be paying close attention to see if he is right.