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FINANCIAL FAIR PLAY AND YOUTH DEVELOPMENT

Submitted by-Ashish Nath Jha Student

Student, Gujarat National Law University

BACKGROUND FOR FFP

The major change which marked the financial expansion in Football when English Premier League secured a $115m television rights deal with Sky TV.[1] This was the time when football was exposed to a much wider audience giving the Business entrepreneurs an opportunity to make large sums of money from an unregulated industry. In 2009 UEFA researched 655 European football clubs and found out that more than 50% had run at a loss over the previous year. This loss included debts due to other clubs for transfer fees.

In terms of Football the investment adjustment is opposite to what it happened in general situations, the biggest clubs are strengthened and the rest are in danger of disappearing, and then they need to sell their best players to survive another season. This, however, encourages teams to spend more than they can manage to earn. The most logical to this problem would be equal revenue-sharing among clubs, which is precisely the idea behind UEFA’s Financial Fair Play (FFP) concept. FFP for game’s well-being [2] was agreed on principle in 2009 by UEFA to try and stop excessive expenditure. This involves assessing a club’s economic situation, penalising them and even excluding them from competitions if they break the financial rules. [3]

The Regulations, updated in 2012, have a number of general objectives including promoting and improving the standard of football in Europe with priority for the training and care of young players, ensuring clubs have adequate management and organization and well-equipped and safe facilities, protecting the integrity and smooth running of the UEFA club competitions and allowing the development of benchmarking for clubs in financial, sporting, legal, personnel, administrative and infrastructure related criteria throughout Europe.[4]

The purpose of this new system is to improve the financial capacity of European clubs to reach a viable business model in the medium and long term. This means that football clubs must spend their money in accordance with their income and not, as was previously the case, with ludicrous budgets and, in many cases, losses. The FFP regulations require that clubs cannot exceed a certain level in the budget for players and coaches, and the cost of amortisation of the transfers. If they do exceed this level, they may be penalised. The maximum penalty is disqualification from European competitions, but other punishments include fines, retention of monies won in competitions and a ban on transfers.

THE OBJECTIVES OF FFP

Article 2 of the UEFA Club Licensing and Financial Fair Play Regulations [5] clearly states their key aims:

  • to promote and continuously improve the standard of football in Europe and to prioritise the training and care of young players in every club;
  • to ensure that a club has adequate levels of management and organisation;
  • to adapt clubs’ sporting infrastructure so as to provide players, spectators and media representatives with safe, suitable and well-equipped facilities;
  • to protect the integrity and smooth running of UEFA club competitions; and to allow the development of benchmarking for clubs against financial, sporting, legal, personnel, administrative and infrastructure-related criteria throughout Europe.

The regulations also aim to achieve financial fair play in UEFA club competitions. These particular aims are:

  • to improve the economic and financial capability of the clubs, increasing their transparency and credibility;
  • to place the necessary importance on the protection of creditors by ensuring that clubs settle their liabilities with players, social/tax authorities and other clubs in a timely manner;
  • to introduce more control and discipline in club football finances;
  • to encourage clubs to operate on the basis of their own revenues;
  • to encourage responsible spending for the long-term benefit of football; and
  • to protect the long-term viability and sustainability of European club football

As part of the application of the FFP regulations, in June 2012 UEFA created a special body called the Club Financial Control Body (CFCB). It is responsible for issuing licences and concessions for teams to participate in UEFA competitions, but also penalises clubs that do not comply with FFP requirements. The CFCB’s Investigatory Chamber is responsible for research and inquiries. It can adopt interim measures and refer cases to the Judicial Chamber, which may impose appropriate disciplinary measures and accept (as well as reject) club applications to European competitions. Any decisions taken by the Judicial Chamber may be appealed before the CAS.

However, UEFA has encountered problems in applying the FFP regulations and their introduction has been delayed. It is intended that by 2017 all clubs will have healthy, debt-free accounts. [6]

THE BREAK-EVEN RULE

Another key aspect of the FFP regulations is the “break-even” rule. This seeks to stabilise and rationalise, clubs’ spending by means of evaluation for a renewable three-year period. Article 60 of the UEFA Club Licensing and Financial Fair Play Regulations defines the break-even concept as “the difference between relevant income and relevant expenses” and adds: “If a licensee’s relevant expenses are less than relevant income for a reporting period, then the club has a break-even surplus. If a club’s relevant expenses are greater than relevant income for a reporting period, then the club has a breakeven deficit.”This means that spending must be equal to income. But a question arises as to what expenses are taken into account? [7]

UEFA does not consider all expenses as losses. On the one hand, UEFA does take into account signings and salaries; on the other hand, however, expenses relating to training, club infrastructure, the youth sector and investment in social projects will not be considered losses.

Article 61 of the UEFA Club Licensing and Financial Fair Play Regulations states that acceptable deviation “is the maximum aggregate break-even deficit possible for a club to be deemed in compliance with the break-even requirement”. As stated above, the acceptable deviation is 5 million Euros. However, a club can exceed this level to reach the following amounts (but only if such excess is entirely covered by contributions from equity participants and/or related parties):

  • E45 million for the first monitoring stage (the 2013/14 and 2014/15 seasons);
  • E30 million for the second monitoring stage (the 2015/2016, 2016/2017 and 2017/2018 seasons); and
  • A lower amount for the following monitoring periods.

YOUTH DEVELOPMENT AND FFP

FFP was brought with the intention to promote financial responsibility; to stop the large number of football clubs who are run by people who spend more than they earn. The result is a classic example of how poorly designed financial incentives can have unintended, sometimes totally counter‑productive, effects.FFP contains such an ill considered clause; something that looked, at the time, harmless, but helped in creating the situation where very few academy graduates at top clubs are making it into first teams.

It works like this: FFP mandates that clubs must break even, and at the same time it exempts a number of costs from the calculation. These include infrastructure spending (like the finance costs of building a new stadium), investment in community schemes (school outreach programmes etc.) and women’s football as well as the full cost of youth development. These expenditures were believed to not be the kind of things that clubs should be penalised for. In the case of youth development, though, what it means is that Premier League clubs can spend as much as they like on their academies without having pressure to cut costs – like transfer fees or player wages – to be FFP‑compliant. And, to add to this incentive, while academy costs are excluded from the FFP calculation, income from sales of academy graduates is included in the profit calculation. It means that not only are significant operating costs excluded from the FFP calculation – meaning there’s no constraint on the number of youngsters in the academy – but the club can also boost their total FFP‑relevant income with player sales. The club is winning in both cases. They can spend as much as they can afford on player development, scooping up young players from around the world, and, if they can then sell them on, they can spend the extra on paying your first team. The more they spend scouting and improving players, then, the more they can get back into the club’s performance on the pitch, even if those youngsters never actually play for the club.

It may help explain, at least in part, why Man City felt able to invest £200m in their youth facilities and Chelsea spends £8m a year running their academy. As a general principle incentivising youth development sounds very important for the rule framers and the Clubs too but, by giving such a wide ranging and valuable exemption i.e. loopholes in the system, which is there in the open to be teased by the clubs. Previously, the measure of an academy’s success was whether its costs were lower than the transfer and wage spending avoided by having graduates in the first team. Or, in the case of economically weak clubs, the measure was if the value of player sales exceeded the running costs of the academy. If enough players didn’t make the first team, that was considered a failure. But now, however, it’s possible to class as a success academies whose graduates never earn a starting place, provided enough of them can be sold to other clubs. Because the income from selling them counts under FFP and the academy cost is excluded under the same. Instead of developing talent, top clubs are incentivised to farm young people for profit. Top clubs, of course, deny this. And it’s very hard to separate what’s legitimate expenditure on developing future first teamers from what’s FFP‑incentivised ‘farming’. In a research in 2015,[8] it was found that two of the least successful clubs had most number of academy graduates in the first team whereas so called rich clubs wouldn’t give the youngsters chance in the first team.

We have a situation where the rules allow the academies of the biggest Premier League teams to help artificially sustain their financial advantage over smaller ones.

For clubs with wealthy owners, it creates an opportunity for disguised subsidies. The owners cannot get a new striker every season or a multi-billion sponsorship deals. So, what they do now is put money in youth development and then sells them for profits without letting them play for the club. By selling them the get the money which would not be in the violation of UEFA’s FFP and then this money will help the clubs strengthen the team by getting an established player. UEFA has time and again stated that FFP is a move to make clubs spend more in their youth set-up but this move is being utilised by the clubs in a different ball-game altogether.

As a result, it is turning youth development into a futures market, where some players are signed as much for their investment potential as their ability to improve the quality of the first. If Third-party Ownership (TPO) is outlawed, this should not be allowed. It is bad for the national side and an unacceptable way to treat dedicated young people pursuing their dreams. [9]

 THE SOLUTION

In an effort to motivate  the clubs to invest more and more in young talent UEFA and the Premier League have inadvertently turned academies in profit centres, creating incentives for them to scoop up ever more players, even ones with little prospect of making the first team. More and more players are brought to the academies which limits the likelihood of any young player to make it to the first team. Improving youth development is a long, complex process.

The Clubs need to be forced to focus on signing only those young players who might genuinely improve their first team. The double break offered by FFP should be narrowed down so that clubs are financially incentivised not just to invest in youth development but to actually play the products of that investment. A first step might be to that the sale of an academy player is only FFP‑eligible income if that player has made, say, 30 or more league starts. Clubs could still sell academy graduates at a profit, but it would only help defray crucial FFP costs if and when they’d had a chance to establish themselves in the first team. Additionally, we could say that clubs could only claim an FFP exemption on a proportion of youth development costs determined by how many of their graduates in a given period were making a set number of starts a season. This would ensure that their youth academy set up is not just for claiming FFP but also to genuinely nurture the young talents and give them an opportunity to make it big.

In this way, Tottenham, for example, would be amply rewarded for the number of young players in their team – even if they do not sell them – while Chelsea’s and Manchester City’s bloated academy projects would become a financial drag on the first team.

If a little more aggression is to be shown then another step can be taken. There can be put a limit on the number of players a club can send out on loan, this would stop clubs running a similar trick by accumulating dozens of graduates from other academies, loaning them out and then selling those who show promise. In this manoeuvre, the cost of the development is pushed onto the clubs borrowing the players, who pay their wages, coach them and then absorb the impact of the inevitable but essential mistakes from which the players learn. The loaning club, meanwhile, books the income from any sales, further boosting what they are allowed to spend on their first team. This is important because, once a player hits 18, his wages become FFP relevant. If somebody else is paying those wages, however, a young player can be pure profit from an FFP perspective. To tackle this, either there can be limit on the total number of players a club can have on loan or FFP charge can be placed on a club, even if the full cost of the loanee’s wages are being paid by the borrowing club.

In other words, we might say that, for example, 50% of a player’s wages still count in the club’s FFP calculation, even if the borrowing club actually pays the full amount. In short order, these measure would begin to influence academy recruitment decisions; when the cost of academy begins to eat into the expenditure on first team wages, the clubs will consider the size of youth development programme, and each player recruited to it, that little bit more carefully. Ideally, there will be a situation where top clubs will be recruiting fewer players and giving more youngsters first team opportunities. This would allow the marginal talents in the academies of the Big Clubs to find a home further down the pyramid – where they will get played earlier, so reducing the number of promising players in their early 20s who have played only a handful of competitive games.

CONCLUSION

Financial Fair Play seems like a very well-planned mechanism brought in by UEFA to curb out the excessive debt in the football sector. Allowing the clubs to only spend as much as they can earn is a right move in achieving the end goal of promoting and improving the standard of football in Europe. However, this well-planned mechanism has its own weak spots. The FFP does not count the expenditure done by clubs for establishing and maintaining youth academies but they do count the profit made by the Clubs after selling the Young Academy Graduate. This comes in as a two way escape route for the clubs as their expenditure would be low but profits will be added. This provokes the Clubs to have extensive youth academy setup where they have many players but they are not given any opportunity to represent the club at First team level. They are there just to hone their skills and make them look like a progressive talent so that these players can then be transferred to another club willing to pay for them.

This calls for sanctions as dreams of many young footballers do not get fulfilled just because the team wants to earn some extra cash. What UEFA can do is to ensure that a certain number of academy players play in the first team throughout the season. This incentive would work in the favour of the players as they will get chances to show their worth rather than just train in academy and sold to other teams. However, no solid steps have been taken by UEFA to prevent such practice. We have to wait and watch what UEFA cares more, the financial stability or Preservation of Young football talent

REFERENCES

  1. Andrew Nixon, ‘Daniel Striani and Uefa’s Financial Fair Play regulations: the new Bosman?’ 1 March 2015, Available at: sportingintelligence.com 
  2. UEFA, ‘Financial Fair Play’ 12 January 2015, Available at: http://www.uefa.org/protecting-the-game/financial-fair-play/index.html 
  3. The Background of UEFA’s Financial Fair Play Regulations, Who’s Who Legal, Available at: http://whoswholegal.com/ 
  4. UEFA Club Licensing and Financial Fair Play Regulations (2012), Available at: http://www.uefa.com/MultimediaFiles/Download/Tech/uefaorg/General/01/80/54/10/1805410_DOWNLOAD.pdf 
  5. UEFA Protecting the Game, Available at: http://www.uefa.org/protecting-the-game/club-licensing-and-financial-fair-play/ 
  6. Stephen Morrow, “ICAS Financial Fair Play- Implications for Football Club Financial Reporting” 2014.
  7. Save the children- How a simple change to Financial Fair Play could improve youth development, The Ugly Truth , Available at: https://theuglygame.wordpress.com/2016/04/27/save­the­children­how­a­simple­change­to­financial­fair­play­could­improve­youth­development/
  8. Which Premier League team has the most youth academy graduates in their squad? Available at: http://www.skysports.com/football/news/11661/10058264/hold-hold-hold
  9. ECA report on Youth Academies in Europe, Available at : http://www.ecaeurope.com/Research