A new dawn for FFP and the expected impact of the new rules

Notwithstanding the impact of the pandemic, player transfer fees in football have been on an upward trajectory for well over a decade. The inequality across European clubs’ financial resources has resulted in an imbalance of power on the transfer market. Against this background, the UEFA Club Licensing and Financial Fair Play Regulations (FFP Regulations) sought to impose financial discipline and protect the long-term viability and sustainability of European club football.

Now the FFP Regulations face a substantive overhaul. (We have previously discussed the procedural amendments here.)

The current FFP Regulations and how they (don’t) work

The main pillar of the FFP Regulations is the so called break-even requirement which aims to ensure that clubs operate on the basis of their own revenue.

Under the FFP Regulations, UEFA may request additional information from the clubs if their employee benefits expenses exceed 70% of their total revenue. Beyond this, clubs do not face further obligations or sanctions should they be in breach of this ratio.

In the current economic environment, clubs try to find financially efficient structures for transfers of players registration, e.g. by signing players who are “free agents” or registering them on loan. By doing so, clubs avoid paying the enormous transfer fees which may disrupt the break-even result. However, player wages still remain a major expense on clubs’ financial statements and whilst they are also taken into account for the calculation of the break-even result, there isn’t an efficient sanction for breaching the ratio of employee benefits expenses to total revenue.

The FFP Regulations may arguably have curbed the trend of wealthy benefactors injecting enormous amounts of money in clubs in order to acquire player ‘galácticos’, which had contributed to the inflation of the transfer market. However, the FFP Regulations have faced widespread criticism and were considered toothless in some quarters. A study of the Technische Universität München argues that the FFP Regulations benefit financially stronger clubs while hindering financially weaker clubs. The rule that clubs ought to operate on the basis of their revenue means that bigger clubs can rely on their already established brands with steady cashflows from sponsoring and broadcasting rights as well as prize money from regular participation in UEFA competitions. These clubs have bigger budgets and can afford to be more active on the transfer market. On the other hand, smaller clubs do not enjoy the same revenue streams and cannot rely on financial injections from external investors to make a play in the transfer market because of a potential distortion of the break-even result. That imbalance arguably prevents smaller clubs from gaining competitive power and being on an equal footing with the so-called big clubs.

The Messi situation and La Liga’s spending caps

Doubts around the effectiveness of the current FFP Regulations culminated during this year’s summer transfer window, when one of world football’s superstars, Lionel Messi, signed a two-year contract with French club Paris Saint-Germain. The Argentinian left FC Barcelona because the club was unable to offer him a new contract, reportedly due to the Spanish football league’s much stricter financial fair play regulations.

In addition to the ex post control imposed by UEFA, La Liga has a set of spending caps that prevent clubs from unsustainably investing extravagant sums in transfer fees and wages. Before each new season, Spanish clubs submit financial data on their revenue and spending to La Liga. Dedicated financial analysts then review the club’s finances and construct a budget that the club can sustainably spend in the upcoming seasons. Teams cannot get registered for the next season if it is clear that they will breach this budget.

In the case of FC Barcelona, it has been reported that the spending cap imposed by La Liga amounts to EUR 97m for the 2021/22 season, around EUR 280m lower than the previous season. According to multiple press reports, even if Messi’s wage would have been reduced by 50%, the club would have exceeded its spending cap, thereby breaching its budget.

Why is PSG “better” off than Barca?

By contrast, clubs in other countries are subject only to UEFA’s FFP Regulations. This difference between the two regimes explains why French giants PSG could afford to sign Messi, while Barcelona watched on as their most prize asset left the club.

While the La Liga rules prevent clubs from overspending on transfers and wages, the FFP Regulations are applied retrospectively. Under the FFP Regulations, clubs are not hindered from overspending, but may have to pay a subsequent fine if they do. Accordingly, PSG reportedly spent 99% of its income on salaries in 2019/20, while Barcelona spent 54% of its income on salaries.

UEFA has now announced the introduction of a stricter set of rules on salary expenses.

New rules on the horizon

UEFA has announced that it is preparing to replace the FFP Regulations with a new set of rules primarily comprised of a salary cap and a ‘luxury’ tax. The salary cap will likely be set as a percentage of the club’s revenue (possibly 70%) and may be accompanied by an upper fixed salary cap – a fixed amount applicable to all participants in UEFA competitions which should not be exceeded – aiming to prevent clubs from artificially inflating their revenue in order to achieve a higher salary cap. The big clubs would still be able to spend more on wages, given their higher income, but the fixed salary cap would set a general limit on wages. For example, if the fixed salary cap is EUR 500 million, a club would not be permitted to spend more than this amount on salaries without breaching the rules, even if the given percentage of their revenue exceeds such fixed salary cap.

The sanction for breaching the salary cap is stated to be a so-called ‘luxury’ tax: for overspending on salaries, a club will have to pay a corresponding amount (possibly as a ratio – e.g., for EUR 1.00 spent over the cap, EUR 1.00 due as a luxury tax). The amounts collected by UEFA will be distributed to the other clubs participating in the same UEFA competition. The luxury tax’s purpose is to protect competitiveness in two ways – it financially impairs the club in breach and at the same time compensates the clubs in the same competition which are indirectly affected by the unlawful behaviour of the club in breach.

Another feature of the new rules is that an increase of the luxury tax is anticipated for repeated breaches. If that proves insufficient, UEFA will retain disqualification from competitions as an ultimate sanction for repeated breaches of the rules.

The luxury tax would have a progressive structure, meaning the more a club overspends on salaries, the higher the ratio (e.g., if the overspending exceeds 20% of the revenue, the excessive amount will be taxed as follows – for EUR 1.00 spent over the 20% excess, EUR 2.00 due as a luxury tax). The step-up of the luxury tax rate aims to restrain those clubs which find it “affordable” to pay the tax.

What about transfer fees?

It will be interesting to see the impact that the new rules have on the issue of rising transfer fees. While the salary cap may limit wage expenditures, transfer fees are another aspect of the “unfair competition” on the transfer market. If clubs’ salary-paying power is equalised to some extent, those who can afford to pay higher transfer fees (should there be no limitations on transfer fees’ spending) would find themselves with the upper hand.

This issue may become even more relevant in light of FIFA’s amendments to the Regulations on the Status and Transfer of Players, effective as of 1 June 2019. The amendments have impacted the third-party ownership (TPO) regime. Once transferred, currently affected players will be excluded from existing TPO bans, providing them with economic rights in the compensation payable for the future transfer of their registration. That creates an incentive for the player to accept the highest bid (in terms of transfer fee) even if that particular club doesn’t offer the highest salary. Such an approach may lead to a circumvention of the salary cap and once again place the richest clubs in a more favourable position. UEFA will therefore need to continue to be mindful of transfer fee spending, and not shift focus entirely onto salary caps.

Comment

The new rules are expected to mark a step-change: a breach of the salary cap will lead to direct economic consequences for the culpable club and financial compensation for other clubs in the same competition.

Salary overspending has been one aspect in which the FFP Regulations have proven ineffective, and UEFA is seeking to redress the imbalance. However, governing bodies should not lose focus on other issues, including the unsustainability of rising transfer fees.