By football lawyer, Daniel Geey @FootballLaw.

Introduction

Bearing in mind John Henry’s recent remarks in his open letter in the aftermath of the summer transfer window, I was kindly asked by Paul and Chris to provide an insight and update as to where clubs and in particular LFC stand regarding Financial Fair Play (FFP).

The aim of this article is to provide a non-technical and accessible explanation of the rules. I have written previously on FFP for The Tomkins Times (click here), and a more technical, lengthy piece (click here).

Ultimately my aim is to inform LFC supporters about what the owners may believe will occur in relation to UEFA FFP whilst ensuring that LFC lives within its means.

The Basics

In summary, the following points need to be understood (warning there are quite a few!):

• As part of its already functioning club licensing system, the FFP rules are to ensure a club, more or less, has to balance its books;

• At its heart is the break-even criteria. Each club that believes it can qualify for next season’s European competitions must, prior to the beginning of that season, apply for a UEFA Club Licence. From the 2013-14 season, the licence stipulations will include adherence to the FFP break-even rules. Until the 2013-14 season, there are no sanctions for breaching the FFP break-even rules;

• The FFP rules promote investment in a club’s stadium, training facility infrastructure and youth development schemes by excluding such costs from the break-even calculation;

• UEFA FFP relates only to Champions League and Europa League participation, and not to domestic league participation. It should however be born in mind that the Football League (FL) has just implemented its own version of FFP for the Championship and the Premier League (PL) is currently discussing various cost saving measures;

• A wide variety of clubs (through the European Club Association) were consulted by UEFA over many months. The regulations have been drafted and implemented with the consent of the clubs;

• The FFP break-even rules will start to bite from the 2013-14 season. The rules need to be borne in mind however from the 2011-12 season onwards because the 2011-12 and 2012-13 season accounts are used to determine a club’s licence application in the 2013-14 season;

• Acceptable deviation is the term used to describe break-even. Acceptable deviation allows clubs to pass the FFP rule break-even test without actually breaking even. The acceptable deviation provisions allow a club with some losses over a certain number of seasons to ‘break even’ and therefore pass the FFP regulations. The below table sets this out.

Explanation Table for Acceptable Deviation

The table shows that the acceptable deviations (i.e. losses) vary quite considerably.

The first point to stress is that if an owner does not put any money into a club by way of cash for shares, each club’s acceptable deviation (loss) (by reference to the last column in the table) is a mere €5m over three years (i.e. €1.3m per season).

For the 2013/14 season when the rules come into force, an owner can inject up to €45m over two seasons to cover the losses of the club. After the 2013-14 season an owner can on average exchange only €15m worth of cash for shares each year to spend on transfers and wages. That figure is reduced to €10m per season (€30m over three seasons) for the 2015-16 season. Should LFC wish to pass the FFP break-even requirement, and it makes for example a €35m combined loss for the first monitoring period (13-14), the owners will have to inject €35m worth of equity into the club. If they do not, LFC will breach the rules.

Explanation of some Important FFP Concepts

Transfer fee amortisation

Very simply put:

‘when a player is purchased, his cost is capitalised on [a club’s] balance sheet and is written-down (amortised) over the length of his contract.’ (Swiss Ramble: Click here)

For example, a player signs in January 2010 for a transfer fee of £10 million on a 5 year deal. Thus the transfer fee in the club’s accounts will show the amortised amount of £2 million each year for 5 years.

The basic point for FFP break-even compliance is that even a transfer that occurs in the 2010-11 season can have an impact on a club trying to break even in the first monitoring period in 2013-14, because clubs amortise the player’s value over the length of their contract.

The Annex XI Provision

In the final annex of the FFP rules is a provision that permits clubs to remove some of its wage expenditure from the break-even calculation. It is not necessary to go into the details of the provision, but needless to say it allows clubs to remove the wage costs of players who have contracts that have been in place prior to 1 June 2010. For clarity’s sake, any contract renegotiations after 1 June 2010 for an existing contracted player would be classed as a new contract. This was the date the rules were first published and it was seen as unfair to punish clubs who would not have been aware of the rules prior to them being made public. For more detail on this stipulation click here and scroll down to the relevant section in the article

Therefore, even if a club fails to meet the standard deviation target (i.e. losses of up to €45m) in the first two monitoring periods when applying for a UEFA license, the club can remove all wage costs from their 2011- 12 accounts for players whose contracts were already in place prior to 1 June 2010. If that cost reduction takes them inside the €45m loss figure and the club’s cost trend is improving, they will not be sanctioned.

How will Financial Fair Play and the Break-Even regulations be implemented?

FFP is already in action and had allowed UEFA to sanction a number of clubs. As mentioned briefly above, the initial step is for all clubs wanting to play in UEFA competition to submit the required licensing documentation to their national FA. The FA then makes the licensing decision which is then communicated to UEFA. UEFA, through its newly constituted Club Financial Control Body (CFCB) has the power to conduct club audits and ask further questions to ensure that the national FA approval/rejection system is applied correctly. If the Panel believes that the FFP rules have not been correctly applied, it has the disciplinary power to sanction clubs in breach.  Bear in mind that FFP applies not only to ensure that clubs break-even, but as you will see below, it covers a wide range of licensing conditions to ensure clubs pay their debts in a timely manner.

UEFA’s CFCB has the power to sanction clubs for breaches of the FFP rules. Such sanctions include a reprimand, a fine, withholding of prize monies, points deductions, refusal to register players for UEFA competition, reducing a club’s permitted squad size, disqualification from competitions in progress and/or exclusion from future competitions.

How the rules constructed and what was their ultimate aim? What is the current political situation?

Clubs have had a large say in the drafting of the rules and as a result some provisions do give clubs leeway to comply with the FFP break-even rules (see Annex XI as described above). The rules are a product of collaboration and negotiation between UEFA and the many interested parties in European football. The FFP rules have been implemented in such a way to ensure gradual adherence (with certain acceptable losses) in order to give clubs time to comply.

My understanding of the consultation process with UEFA and the ECA in particular is that a number of  concessions were made (i.e. the Annex XI provisions, the staggered acceptable losses approach and the removal of all infrastructure and youth development costs from the break-even calculation) in order to get clubs across the finishing line.

My belief is that the rules are not in place to catch clubs out. Rather they are there to guide clubs into a more responsible era of spending where everyone plays by the same rules of the game. UEFA describes it as adding “rationality” into the football finance landscape.

I think fans need to understand the overall objective for the rules is to bring clubs into line. This may not happen overnight and people may not be happy that break-even is not actually break-even. However the benefit of this incremental approach is that the top clubs will have to ensure that after a bedding-in period they will have to break-even.

Everyone that I have spoken to at UEFA is consistent in insisting the CFCB will sanction clubs who breach the FFP rules. UEFA’s general secretary, Gianni Infantino, has stated:

“We would bar clubs in breach of the rules from playing in the Champions League or the Europa League. Otherwise, we lose all credibility.”

Sanctions as explained above, will take many forms. It should be stressed that it is far from certain that a club that breaches the FFP regulations will be automatically excluded. Although the above are all possible sanctions, it appears likely from the outset (from the 2013-14 season) that a raft of sanctions will be imposed and not just the harshest sanctions for breaching the rules. This is unless presumably there is a blatant flouting of the rules (i.e. someone posting a loss similar to Chelsea’s £140m in the 2004/5 season). High profile club sanctions should not be ruled out but exclusion will certainly be saved for only the most blatant offenders.

Are there any recent examples which show that UEFA mean business?

Only last week, UEFA announced that it was to withhold prize money for clubs who had qualified for UEFA competition but who had ‘overdue payables’ due. It is important to stress is that such sanctions are not about breaching the break-even criteria. (See here.)

The withholding of prize monies by UEFA is for breaching the overdue payables provisions of the UEFA licensing regime (i.e. outstanding debts not paid at a particular time to other clubs, employees and social/tax authorities). The overdue payables provisions are part of the wider club licensing and FFP that are currently in force.

Nonetheless, big clubs have been sanctioned, including Atlético Madrid, Málaga, Sporting, Rubin Kazan, Partizan and Fenerbahçe. Many may suggest that this is a show of strength by UEFA; that it means business by imposing such sanctions. In addition, the Court of Arbitration for Sport (CAS) in the last few months has more or less upheld sanctions imposed by UEFA on Besiktas (a two year suspended exclusion and a fine), Bursaspor (a one year suspended exclusion and a fine) and Gyori (exclusion for two seasons with the third season suspended and a fine) for breaching the FFP overdue payables rules. The difference is that no exclusions have taken place for breach of the break-even part of the FFP rules yet because the first monitoring period has not kicked in.

At a time when some believed that the licensing regulations were merely window dressing, UEFA is showing that its regulations bite. UEFA has the power to sanction clubs and is sending out a strong message that certain overdue debts will not be tolerated. By comparison, when the break-even requirement comes into force (in ’13-14), similar, if not harsher sanctions, may well be applied.

Are FSG the only ones adhering to the FFP ideal? What if no one bothers to comply?

I believe the majority of clubs wanting to play in UEFA competition from the ’13-14 season onwards have been quietly implementing break-even compliance plans. During the consultation process, clubs would have been made aware of the ramifications of non-compliance. The more proactive clubs will continue to  liaise with UEFA in order to understand how to meet the FFP and break-even requirements. I understand that UEFA has been assisting clubs for their break-even assessments but it will ultimately fall on clubs to ensure compliance.

Could non-compliant clubs just start a European super league?

Clubs may make rational decisions not to comply but that would certainly be a high risk strategy. They could theoretically breakaway from UEFA (and FIFA) and form their own competition and thus not be bound by the rules anymore. It could become rather complicated because players for those clubs may not be eligible to play for their national team as a result. My own belief is a somewhat more straight forward theory. There are some very large clubs in the main European leagues like Real Madrid, Arsenal, Manchester United and Bayern who all posted profits in their last accounting period. Barcelona made a small loss and can thus be added to the list. It means some of the giants of European football are almost certain to pass the break-even criteria.

There are then clubs like Zenit, PSG and Manchester City that have recently spent considerable sums in order to break into the established order. These aspiring clubs are the teams most at risk of non-break-even compliance. They are most at risk because they want to compete with their larger revenue generating European rivals.

The top clubs that are making profit have a competitive advantage to maintain the break-even model because they have the ability to generate the highest revenues. They are incentivised to remain in the competition because the very rules that bind them provide them with the greatest advantage over their lesser competitors. They thus have a greater chance of sporting success in European competition.

The more recent free spenders like Manchester City and PSG have historically not had such high levels of sporting success. In order to attract more fans, sponsors, players and TV exposure, they require high profile matches against the highest profile teams. Should such aspiring clubs fall foul of the regulations and be excluded (the harshest possible sanction) because of their quest to compete at the very highest levels, if the top clubs are relatively content with the status quo, it would be difficult for such clubs to breakaway. This is because the product would be less attractive without the top headline clubs to compete against.

One caveat to my theory are the three largest Italian clubs by revenue (Milan, Juventus and Inter). They all made losses of around £50m in their last set of accounts. Milan for example, in selling Ibrahimovic and Silva to PSG for a combined €65m have saved over €150m on future wages and transfer amortisation according to their owner Mr Berlusconi. Should the Italian clubs and other clubs in UEFA competition breach the break-even rules it is  less likely they will be expelled unless, as stated previously, their losses are abnormally large. As such there is less risk of expulsion which would calm any threats of a break-away. Recently the head of the ECA (the representative European club association) Karl-Heinz Rummenigge said:

“It seems that quite a few clubs have not understood the message. Time has come to take the new rules seriously. ECA will continue to support Financial Fair Play.”

It appears the majority of clubs are in favour of the rules. Some clubs may however not be so polite if, and when, they incur the wrath of UEFA for FFP infringements.

Is LFC likely to comply with its break-even obligations?

It is a very tricky answer to give without having in-depth access to the club’s accounts. Swiss Ramble has explained that had it not been for the current owners having to write off £59m in stadium development expenses, LFC would have made a £10m profit in its last published set of accounts. However, excluding the Torres sale would have realised a £20m loss. Remember, the break-even calculation in the first monitoring period is based on two, and then in subsequent monitoring periods (usually) three sets of accounts. So long as LFC makes a loss of no more than €45m in the first monitoring period (as you can see from the table at the beginning of this article) and the owners are willing to cover that loss, LFC will not breach the break-even criteria. The only individuals that know for certain whether LFC will break-even under the UEFA regulations are likely to be the board and LFC’s accountants. This is because certain cost deductibles (Annex XI, youth and training development costs for example) will be difficult to extrapolate from the club’s accounts.

That said, here are a few reasons why LFC may be in a healthier position to comply with the regulations than other clubs across Europe.

• Champions League Shortfall. Over the last three seasons, and I believe set out in the two previous sets of the most recent accounts, LFC has lost out on significant Champions League revenues. Last season Chelsea made €60m, Manchester United €35m, Arsenal €28m and Manchester City €27m. The Europa League is very much small change. Even without the golden prize of Champions League revenues, LFC has not been making astronomical losses (taking away exceptional items). Indeed, LFC continues to feature in the Deloitte Football Club Money list. Most recently in 9th position earning €203m for revenues generated in the troubled ’10-11 season. Should LFC achieve Champions League status once more, this should provide the club with greater revenues to offset against costs.

• Premier Leagye TV Deals. The latest £3bn domestic PL TV deal that was announced recently (which was a 64% increase on the previous deal) will significantly increase the revenues of all PL clubs participating in the league come the ’13-14 season. Those that finish higher in the PL (hopefully including LFC) will benefit from higher placed payments whilst there being a greater likelihood of more frequent TV appearances, thus benefiting from larger facility fees. Under the current distribution system and factoring in an increased foreign TV rights deal, Swiss Ramble believes there may be an additional £30m per season on offer for the PL’s top clubs. Manchester City received £60m from the PL for winning the title. That could rise to over £90m from the 2013-14 season. This additional revenue, so long as it does not spark another round of transfer and wage inflation, will assist PL clubs, including LFC, in complying with the FFP rules.

• Stadium Redevelopment. As explained above, the cost of refurbishing Anfield, which appears the preferred option, is excluded from the break-even cost calculation. This is to LFC’s benefit. UEFA is keen to incentivise long-term revenue-generating projects like stadium construction and/or improvements. The net result of an improved capacity and a higher proportion of corporate seats will certainly dwarf current home match day revenues. By way of brief comparison, Manchester United makes £3.7m per home game, Arsenal £3.3m, Chelsea £2.5m, Spurs £1.6 and LFC £1.5m. The potential revenue growth is obvious.

• Stadium Naming Rights. Linked to stadium revenue growth is the underlying issue of how to raise money to fund the stadium. Until recently it was unclear whether Fenway would consider a naming rights deal for Anfield. In answering questions posed by Tomkins Times members, John Henry did not rule out such a move. While I am a firm believer in Anfield remaining as Anfield, I challenge any LFC fan to argue against the value of giving a naming rights deal serious consideration if it halves the construction costs for the stadium and consequently allows LFC to continue to compete in the transfer market during the high financing construction phase of the project.

• Commercial sponsorship arrangements. With reference specifically to shirt sponsorship, LFC have the 5th largest deal behind Manchester United, Barcelona, Bayern Munich and Real Madrid. Manchester United recently announced a jaw-dropping £45m new shirt deal with Chevrolet starting in time for the ’14-15 season. Their innovative approach to sponsorship has also lead to a £10m per season DHL training kit deal. Where once LFC was on par with United, our neighbours have soared ahead. It does however open up the possibility in the future that a sponsor may wish to pay similar amounts for a club with such global appeal (if not the recent success that United has enjoyed). Similarly, LFC’s kit deal with Warrior has boosted the club’s coffers significantly. The deal is over double the amount of the previous Adidas deal. Importantly, LFC is also able to have control over non-branded merchandising. LFC believe this will significantly boost club revenues (see here).

• Lastly, and a somewhat more tenuous point, the FFP rules may just provide opportunities for clubs like LFC who are more likely to comply with the break-even criteria to take advantage of any difficulties large spending PL clubs may face should they breach the break-even criteria by a large margin. If so, the next best placed club in the PL would take their place. That may be LFC.

Conclusion

As you can see, FFP is in force and UEFA is not afraid to sanction clubs accordingly. Liverpool FC – so long as they can regain their place in the Champions League and move forward with stadium issues (two big ifs!) – should be in good shape to comply with the regulations, in part because of the emphasis the owners have placed on the club’s compliance. The most important question however is not whether UEFA will sanction clubs, but what the sanction will be. Clubs that breach the rules by small margins will be less likely to be expelled from UEFA competition. The proportionality or reasonableness of the sanction will then have to weighted against the severity of the breach. Although that may not sit too well with some, it is likely to be the way that the sanctions will be applied.

Daniel Geey advises clients in the football industry. Such guidance has included advice on the Fit and Proper Person Test, ownership requirements, parachute payments and the football creditors rule, disclosure obligations under the relevant football authority’s rules, conflicts of interest and third party player ownership contracts. Daniel has also provided guidance on UEFA Financial Fair Play Regulations and how the rules may affect the future financial planning of football clubs. He has also given briefings and spoken at workshops and conferences on the interplay between Competition Law, Football and Broadcasting.