In the short break in Europe's football season, clubs' off-field administrative teams will not be free to indulge with the players in leisurely summer holidays, for significant backroom change is afoot. Next season will see professional football clubs under close financial scrutiny from the game's European governing body, UEFA. In the wake of high profile clubs' financial disasters and near misses in recent years (notably Fiorentina, Portsmouth, Racing Santander) UEFA decided it was time to intervene from on high. Last year the Financial Fair Play ('FFP') concept was formally introduced with the aim of monitoring the financial performance of participants in UEFA club competitions. Failure to meet the FFP rules would result in that club facing the ultimate sanction of a ban from UEFA club competitions.

UEFA President Michel Platini has been the driving force behind the FFP rules, introduced on 1 June this year. Platini's desire to push through these reforms was no doubt underpinned further by a UEFA report identifying that some 50 percent of top European clubs were losing money and 20 percent were producing serious deficits. These figures come at a time when, superficially, European football is experiencing the greatest commercial success it has ever known, evidenced this year by £900 million generated from the sale of Champions League TV and commercial rights alone. Evidently, there is significant financial appetite for top flight European football. Yet, UEFA assert, the exponential spending trend that has gripped the game, such as Chelsea's £50 million purchase of Fernando Torres or Wayne Rooney's £250,000 weekly salary, is unsustainable and will prove detrimental to all clubs, sooner rather than later. Thus, the FFP rules were published last May and introduced across Europe to a generally welcome reception with the fundamental aim of preventing clubs spending more than they earn.

The European Clubs' Association has wholeheartedly backed the new rules with its chairman, Karl-Heinz Rummenigge, believing they will bring much needed rationality into football club finances. Richard Scudamore, chief executive of the English Premier League insisted the EPL would also be backing the measures, which is significant given that clubs such as Chelsea and Manchester City are prime examples of the current spending culture.

The key provisions set out in the FFP rules fall under the following areas:

  • Break-even requirement – clubs must ensure that their expenditure is not more than the income they generate over a period of time;
  • No overdue payables during the season – clubs must not owe money to other clubs, employees and/or municipal/tax authorities; and
  • Provision of future financial information – to ensure clubs can meet their future financial obligations.

In order to monitor and enforce the FFP rules, UEFA has set up the Club Financial Control Panel (chaired by former Belgium Prime Minister Jean-Luc Dehaene). The Panel's remit is to govern the club monitoring process and in particular, assess the information submitted to ensure clubs have met all FFP requirements. There will be a phased implementation of sanctions from the FFP rules and financial information will be submitted over the initial period of the next two seasons. Any enforcement action would be based on financial information relating to this period meaning the first season where a club could be banned from UEFA club competitions is 2013-2014.

With this said, UEFA's intention was not to stifle all financial investment into football and certain exceptions will be disregarded from the Panel's assessments. Investment in clubs' stadiums and money invested into youth and community development programs will be disregarded. Clubs will also be able to have covered losses of up to €45 million to ensure the break-even requirement is met in the initial implementation period. This €45 million will be reduced to €30 million over the 2014 to 2017 seasons. Furthermore, an additional €5 million loss will be permitted for each assessed period going forward, which does not have to be covered or underwritten. Although these covered losses or "acceptable deviation" figures of €45 million and €35 million sound generous leeways, operating with losses of no more than €5 million by 2018 may prove difficult in reality. By way of example, we set out the extent of certain EPL club losses stated in their 2010 financial results: Manchester City: £121.3 million, Manchester United: £83.6 million, Chelsea: £70.9 million, Liverpool: £55 million. Clearly significant efforts will need to be made by clubs to fall within the FFP rules. Even though some benefactors are willing to sign blank cheques to clear losses, UEFA's ultimate aim is for clubs to not operate at a loss but to breakeven. Supporting this aim, Scudamore said, "breakeven as a concept has got to be good in business".

The rules relating to "no overdue payables" require immediate adherence as they came into force on 1 June this year. Clubs may no longer be indebted to other clubs, employees and/or municipal/tax authorities. EPL clubs collectively made a record turnover last year of £2.1 billion but on average 68% of this figure went on wages. National Insurance and PAYE contributions paid on employee wages cause significant financial problems. The enforcement action taken by HM Revenue & Customs against Portsmouth in 2010 and Plymouth Argyle this year show immediate adherence to no overdue payables may not be easily achieved so quickly. Sadly, not all clubs appeal to the likes of Roman Abramovich (Chelsea) and Sheikh Mansour (Manchester City) whose loose pocket change would cover the majority of clubs' financial woes. EPL player wages have increased rapidly to amounts never before dreamed of thanks largely to the influx of super wealthy club owners but admittedly it is not only the EPL that has witnessed this exponential wage inflation. Spain's "La Liga" has similar player wages at Barcelona and Real Madrid and the Milanese clubs in Italy are not far behind. The reality is that not all clubs can operate with such huge salary burdens, but there is no evidence of wages being reduced. The FFP rules may have come just at the right time.

In order to facilitate the Panel, each club must produce a year's projected financial statements in addition to audited accounts for reporting periods beginning and ending July to June; 1 July being the start of UEFA's club competition calendar. The enhanced future financial information must provide budgeted profit and loss accounts, cash flow and balance sheets comparative to preceding annual results. The explanatory notes that must accompany these projections have to set out how the break-even calculation will be reached. In a business with so many uncontrollable variables this will not be an easy task. For example, if a club like Arsenal (who unexpectedly finished fourth in the EPL) failed to make the Champions League group stages next season, they would be at least £25 million worse off. Their projections would assume a Champions League berth each season, but the financially catastrophic effect of failing to reach the group stages would throw their break even projections significantly off-kilter. The Panel does rely on two years' worth of financial information but clubs will be under pressure not to overestimate their financial performance.

Adherence to the FFP rules is compulsory and UEFA has "full confidence" that clubs will stick to them. The ultimate sanction must indeed be deterrent enough. Yet, clubs will be quick to rely on safe harbours and look to maximise acceptable deviations. The latter will be of limited use in the long run and we are likely to see exploitation of loop holes and greater emphasis on each club's commercial ventures. Investigating revenue streams such as stadium naming rights or additional sponsorship structures will be encouraged. Conversely, raising ticket prices and merchandise costs will not.

For all the hype and rhetoric emanating from UEFA that clubs need to "face the music", whether in reality we will see enforcement of its ultimate sanction against a high-profile club is another matter. UEFA has banned 27 clubs from European competitions in the last five seasons for not meeting its licensing requirements, but not one of the these clubs would be classed, "high-profile". Indeed, clubs have not tightened their belts just yet and AC Milan's vicepresident Adriano Galliani's description of the £225 million spent by EPL clubs this January transfer window as "crazy" may not be too far short of the mark. However, clubs that may appear to be flouting the FFP rules have been quick to dispel accusations of irreverence or non-compliance. Khaldoon Al Mubarak, chairman of Manchester City, said, "I am very comfortable, very confident with our financial operation and our understanding of the UEFA rules". With an FA Cup win, an assured Champions League spot next season and a recent landmark stadium naming deal with Etihad in place, this confidence may not be unfounded. Equally, Chelsea's chief executive Ron Gourlay is confident of his club's financial status claiming, "[Chelsea] is in a strong position to meet the challenges of [FFP] initiatives...".

The noble aims of Platini and the FFP rules should be greeted with the sincerity and good will that brought them into play. In reality however they may prove overly simplistic and burdensome on the clubs. In Formula One, we have seen similar blanket measures to tackle the spending of teams, namely the Resource Restriction Agreement, which seeks to restrict employee numbers and external expenditure. However, there is widespread disbelief as to how closely teams are observing its provisions and Max Mosley has suggested that Red Bull requested an exception for exceeding the spending limit. No doubt the fact that the Resource Restriction Agreement is self-policed by the Formula One Teams Association does not help the popular perception that it lacks bite. FFP is at least regulated externally by UEFA.

Will FFP enjoy similar difficulties in football? Enforcement will be key and, without fundamental change to the financial culture in top flight football, especially regarding player wages, it remains to be seen whether UEFA will have the stomach to take on the clubs. Unless FFP is embraced wholeheartedly by all, it may not revolutionise the financial position of the European game to the extent currently envisaged.

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