Cultivating Financial Sustainability for Football Clubs in Europe; Examining Financial Fair Play Regulations

By Aaron Stromberg

Question Presented

Whether the United European Football Association’s (UEFA) Financial Fair Play (FFP) Regulations serve their intended purpose—cultivating financial sustainability for football clubs in Europe—against the backdrop of European Union (EU) competition law. 

History of FFP and EU Competition Law

In the aftermath of the 2008 global economic crisis, UEFA recognized a burgeoning concern regarding financial instability permeating European clubs.¹ As the governing body charged with regulating top-flight football in Europe, UEFA implemented a financial strategy, FFP, in 2011, “based on the principle that clubs should compete on the basis of their own financial resources” and “improve… long-term stability and sustainability of club football.”² While the majority of UEFA’s original regulations tended to comprise mostly of “sporting rules,” the most profound and controversial is FFP, essentially allowing UEFA to regulate finances of clubs.³ FFP achieves its aim through a “break-even” requirement, ensuring that expenditures do not exceed revenues while permitting minor deviations.⁴ Thus, UEFA’s stated objectives of FFP are to, “introduce more discipline and rationality in club finances by operat[ing]… for the long-term benefit of soccer.”⁵

The Treaty on the Functioning of the European Union (TFEU) sets out organizational and functional details of the European Union.⁶ Article 101 of the TFEU establishes pillars of EU competition law.⁷ Pursuant to Article 101, restrictive agreements between independent market operators acting either at the same level of the economy, often as potential competitors, or at different levels, are per se prohibited.⁸ Article 101 precludes any form of collusion between undertakings which may have an adverse effect on competition within an internal market.⁹

The primary challenges and controversies enveloping FFP are that it violates EU competition law. Notwithstanding, EU legal bodies (EC) recognize the special role sports hold in the cultural development of communities across Europe, so it carved out a certain deferential perspective when determining how to apply competition law to sporting regulations.¹⁰ When given the opportunity to intervene, EC has remained silent because, “(1) the EC has previously voiced its support for the principles behind FFP, (2) the EC’s silence continues to build on the positive relations between the EC and UEFA in the broader context of sports autonomy and (3) the EC has previously provided guidance to UEFA on the types of regulations it will tolerate and is waiting for UEFA to make the necessary changes to FFP.”¹¹

The European Court of Justice (ECJ) laid out a test to determine if a sport regulation is deemed to meet EU competition law. In Meca-Medina, the ECJ noted that “a rule issued by a sport association… may not breach [TFEU] to the extent that the rule in question pursues a legitimate objective and its restrictive effects are inherent in the pursuit of that objective and are proportionate to it.”¹² Theruling demonstrates willingness to specifically exempt competition law to sports, infusing a scrutiny tantamount to that of U.S. rational basis review.¹³

FFP Breaches and Action

If a violation of FFP is committed, UEFA can deploy a wide range of financial and sporting punishments for breaching FFP rules.¹⁴ Most recently, clubs such as Barcelona, Manchester City, and Manchester United have faced sanctions for undermining FFP regulations, but results were lackluster with a degree of leniency shown to these historically superior clubs.¹⁵

However, the flaws in enforcement highlight how FFP is falling short of expectations. A paradigm example of the inefficacious application of FFP punishment is elucidated by Manchester City’s near decade-long violations. Between 2009 through 2018, City was accused of providing misleading information and misrepresenting its finances after ownership change to Abu Dhabi’s ruling family.¹⁶ Despite a plethora of inculpatory evidence against City, enforcement fell wholly short of expectations, with the perception that City could operate with impuginty.¹⁷ It was revealed that impartial proceedings did not occur to ensure matching FFP punishment for the violations.¹⁸ Thus, FFP violation results are untrusting and call into question whether it subverts the proscriptions of EU competition laws.

Recommendations

At its inception, the objectives and intended purpose of UEFA’s FFP fit well within the limited exception of EU’s competition laws. However, in practice, FPP has fallen significantly short of its objective such that review of its structure elucidates a need for reformation.

            Tri-Tier Break Even System

Specifically, an issue with FFP is that it ensures that smaller clubs cannot financially compete with bigger clubs, resulting in a significant increase in the revenue gap between bigger and smaller clubs; a strong indicator that FFP is fossilizing leagues and entrenching consolidated dominance.¹⁹ A tweak to FFP’s current composition would be significant: The Tri-Tier Break-Even System (TTBS).²⁰ This reformation strategy entails separating member clubs into three distinct brackets based upon respective revenues. In doing so, UEFA’s licensing procedures and relevant income and expenditure calculations remain unchanged concurrent with the same break-even formula, but the tiered categorization would allow for different deviations based upon a club’s rank in the three pods.²¹ For example, the top third of clubs—i.e., the historically preeminent clubs—will be permitted to deviate from break-even far more stringently than the lowest third, permitted reasonable but larger deviations.

All clubs are encouraged to break even, but the flexibility for clubs positioned further down the economic food chain will have the opportunity to grow their club in the short-term without risking the long-term financial health of their club in the long. This tiered system will allow, “spending beyond revenues, but not beyond reason” to bolster the growth of clubs.²² Therefore, rather than adopting an entirely new regulatory system, TTBS improves FFP by better adhering to the proscriptions TFEU and creates a more compatible exception.²³

Alternatively, UEFA could effectively scrap FFP and replace it with a new system:

Salary Cap and Luxury Tax Structure

Implementing a salary cap and luxury tax structure could be one step towards achieving competitive balance coupled with financial stability. For instance, many American professional sports leagues adopt various iterations of a salary cap system that penalizes teams or clubs for exceeding a predetermined financial threshold.²⁴ By implementing a soft salary cap, similar to models used by the NBA or MLB, clubs that wish to exceed the cap would be obligated to pay a luxury tax, which would then be redistributed to lower-revenue clubs. This redistribution mechanism would not restrict market freedoms but would engender a more level playing field helping smaller clubs compete for talent. Historically dominant clubs begin the financial race from vastly differing starting positions, so the soft cap and luxury tax could resolve embedded issues.

Revenue-Linked Investment Model

Under the current break-even FFP regime, club spending is directly tied to revenue such that well-established clubs benefit disproportionately and create perpetual financial disparity. FFP could modify its present approach to allow clubs to spend a percentage above their revenue, contingent upon the extra investment being aimed at long-term growth (such as infrastructure, youth development, marketing). By carving out exceptions or relaxed limits on spending, smaller clubs could more freely promote long-term growth and stability, without fear of compromising short-term ambitions. Under EU competition law, this would be less restrictive since it allows for more flexibility in spending combined with financial prudence. Such targeted spending would also be seen as promoting market efficiency without unfairly distorting the competitive balance.

            Harsher Enforcement with Graduated System of Penalties

The present FFP dynamics witness inequitable enforcement—with large clubs often facing lenient sanctions or appeal penalties (e.g., Manchester City)—which ultimately undermines the effectiveness of FFP. A graduated system of penalties would take into consideration a host of factors such as character, quantity, and severity of breach, repetitiveness of misconduct, willful or intentional violations, and could hand down commensurate punishments with more proven, trusted uniformity while creating stronger deterrents for club overspending and misreporting. Due to the paramount importance of transparency, this recommendation satisfies EU competition laws via equal treatment, promotes fair competition and curtails ulterior motives swaying enforcers, thus adhering to proportionality principles.

Conclusion

FFP regulations are not serving their intended and expected purposes to galvanize financial stability in promotion of “the beautiful game.” The proposal for change to the current regulatory system begins with exemplifying a concerted effort to garner uniformity for all member clubs and ends with concomitant, stronger punishment when breaches surface. By balancing financial oversight with flexible investment opportunities which acknowledge disparate club compositions, these changes could create a more competitive and financially healthier European football union to achieve UEFA’s vision.

Footnotes

1. “Manchester City’s FFP Hearing: What Are the Charges and Possible Penalties?” Sportstar, The Hindu, September 25, 2023, accessed September 25, 2024, https://sportstar.thehindu.com/football/epl/manchester-city-ffp-hearing-charges-penalties-explained-financial-irregularities-abu-dhabi-group-guardiola-football-news/article68647639.ece.; See also “Part 1: Balancing the Books – An Introduction to the UEFA’s Financial Fair Play Regulations,” Meritas, accessed September 25, 2024, https://www.meritas.org/insight/article/part-1-balancing-the-books-an-introduction-to-the-uefas-financial-fair-play-r#:~:text=The%20official%20FFP%20are%20a,threaten%20their%20long%2Dterm%20survival  (“A 2009 UEFA review showed that more than half of the 655 European clubs incurred a loss over the previous year, and although a small proportion were able to sustain heavy losses year-on-year as a result of the wealth of their owners, at least 20% of clubs surveyed were believed to be in actual financial peril. A report by Deloitte indicated that total debt among the 20 Premier League clubs for the year 2008–09 was around £3.1 billion. For example, between 2005 and 2010, West Ham United recorded an aggregate net loss of £90.2 million.”)

• Sven Van Kerckhoven and Glenn Rayp, “The EU’s Governance of Global Finance: European Bond Markets under Stress,” Journal of European Integration 43, no. 7 (2021): 827-843, accessed September 25, 2024, https://www.tandfonline.com/doi/full/10.1080/17441056.2021.1935570. (“The risk of being excluded from the Champions League, which is European soccer’s most prestigious and financially rewarding competition, leaves clubs with no choice but to comply with UEFA’s regulations, regardless of how onerous they may be.”)

• Id.

• Id.; See also “Part 2: The Rules and Regulations of UEFA’s Financial Fair Play (FFP) – The Premier League and Beyond,” Meritas, accessed September 25, 2024, https://www.meritas.org/insight/article/part-2-the-rules-and-regulations-of-uefas-financial-fair-play-ffp-the-premi. (“On announcing the new legislation on 15 September 2009, former UEFA President Michel Platini said: ‘Fifty per cent of clubs are losing money and this is an increasing trend. We needed to stop this downward spiral. They have spent more than they have earned in the past and haven’t paid their debts. We don’t want to kill or hurt the clubs; on the contrary, we want to help them in the market.’”)

• Id.

• “Article 101(1) and (3) – Introduction,” Practical Law, Thomson Reuters, accessed September 25, 2024, https://uk.practicallaw.thomsonreuters.com/2-107-6192?transitionType=Default&contextData=(sc.Default).

• Ariel Ezrachi, An Introduction to EU Competition Law, “Key Concepts of Article 101 TFEU,” (Cambridge: Cambridge University Press, n.d.), accessed September 25, 2024, https://www.cambridge.org/core/books/abs/an-introduction-to-eu-competition-law/key-concepts-of-article-101-tfeu/5A0F82CEF360A8827DDA4C46E12CE0DE.

• Id. (“It also precludes decisions by associations of undertakings and concerted practices. These three types of coordinated market behaviour fall into the ambit of EU competition law if they may affect trade between Member States to an appreciable extent and if they have as their object or effect the prevention, restriction or distortion of competition within the internal market.”)

• Id.

1. Sven Van Kerckhoven and Glenn Rayp, “The EU’s Governance of Global Finance: European Bond Markets under Stress,” Journal of European Integration 43, no. 7 (2021): 827-843, accessed September 25, 2024, https://www.tandfonline.com/doi/full/10.1080/17441056.2021.1935570.  (“European courts and decisions of the [EC] show that the specificity of sport [is] recognized and taken into account” when determining how EU law is to be applied to sporting organizations. Respecting the “specificity of sport”, EU legal bodies have distinguished “between cases involving purely sporting rules, as opposed to those which have an economic or business dimension, on the view that the former would clearly be exempt from antitrust scrutiny.”

1. Id. (“Whereas common experience tells us regulations that are prima facie violations of the law will be struck down, the EC seems to shift the burden with UEFA and upholds regulations that are prima facie illegal so long as there is an exception built in which can be perceived as compatible with EU law. Having provided this guidance, it is likely that the EC is taking a hands-off approach and affording deference to UEFA to follow this pattern and make the necessary changes to FFP without the need for EC interference.”

1. See Meca-Medina v. Commission (2006)

1. Id. (“Principle of proportionality requires the adoption of the least restrictive measure capable of achieving the stated aim.”)

1. “Part 3: Debunking the Breaches and Myths of UEFA’s Financial Fair Play Regulation,” Meritas, accessed September 25, 2024, https://www.meritas.org/insight/article/part-3-debunking-the-breaches-and-myths-of-uefas-financial-fair-play-regulation. (“[Punishments] include: 1) A formal written warning; 2) Fines and compensatory payments; 3) Points deductions from current or future seasons; 4) Withheld or reduced revenue from a UEFA competition, such as the Champions League; 5) Prohibition from registering new players for UEFA competitions, such as the Europa League; 6) Disqualification from competitions; and / or 7) Exclusion from future competitions.”)

1. “Man United, Barcelona Hit with UEFA Fines for FFP Breaches,” ESPN, July 14, 2023, accessed September 25, 2024, https://www.espn.com/soccer/story/_/id/38009485/man-united-barcelona-hit-uefa-fine-ffp-breaches. (“United were handed a €300,000 ($336,420) fine for “minor break even deficits” for the financial years spanning between 2019 and 2022. Barca, meanwhile, were issued a larger €500,000 ($560,700) fine “for wrongly reporting, in the financial year 2022, profits on disposal of intangible assets (other than player transfers) which are not a relevant income under the regulations.”)

1. “Manchester City’s FFP Hearing: What Are the Charges and Possible Penalties?” Sportstar, The Hindu, September 25, 2023, accessed September 25, 2024, https://sportstar.thehindu.com/football/epl/manchester-city-ffp-hearing-charges-penalties-explained-financial-irregularities-abu-dhabi-group-guardiola-football-news/article68647639.ece.

1. Id. (“In February 2020 City was banned from UEFA competition for two seasons for “serious breaches”, including overstating sponsor revenue and failing to cooperate with investigators. The Court of Arbitration for Sport (CAS) overturned the ban in July 2020, ruling that some UEFA charges were not proven and other evidence was excluded as time-barred. The court “strongly condemned” Man City for obstructing UEFA’s investigation.)

1. Sven Van Kerckhoven and Glenn Rayp, “The EU’s Governance of Global Finance: European Bond Markets under Stress,” Journal of European Integration 43, no. 7 (2021): 827-843, accessed September 25, 2024, https://www.tandfonline.com/doi/full/10.1080/17441056.2021.1935570. (“[T]he Der Spiegel revelations alleged that then UEFA President, Gianni Infantino, negotiated directly with Manchester City to help the club reach a favourable settlement and avoid harsh penalties during prior UEFA investigations of Manchester City, making UEFA complicit.”)

1. Id.

• Id.

• Id.

• Id.

• Id.

• “Salary Cap Differences Between the NFL, MLB, and MLS,” Fanteractive, accessed September 25, 2024, https://www.fanteractive.com/arcticle/salary-cap-differences-between-the-nfl-mlb-and-mls.

Stromberg is a current J.D. candidate at Santa Clara University School.