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May 6, 2014

Can UEFA Design A Sensible Financial Fair Play System?

By Ted Knutson

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Potential sanctions were announced this morning from the results of the FFP investigations against Manchester City and Paris Saint Germain. Included with the 60M Euro fine for each club are also Champions League roster size restrictions, and a wage cap. Where is the fine that each team pays going? We don’t know. At this point, we’re not even sure UEFA knows. That’s pretty awkward, given how long a period FFP has been phased in for, and how long UEFA have had to actually think about such things, but hey, it’s football.

In fact, the whole thing is kind of awkward, as clubs are involved in negotiating their own sanctions, as well as admissions of what they did and did not breach. Regardless, these sanctions are actually quite a bit more than a slap on the wrist. The fine from UEFA is enough to wipe out the entirety of City’s Champions League payout from 2011-13. Yes, the owners are unbelievably rich, but in terms of financial impact on City itself, that fine is large. The roster size restriction also inflicts some pain, though that will mostly be restricted to City’s adventures in Europe.

Regardless of all this, the whole thing feels unmistakeably haphazard.

Are the sanctions actually going to achieve their goal?

What was the goal in the first place?

And sweet jebus, if you are going to fine a club £50M, you might want to have a clear concept of where the money is supposed to go.

Today I want to briefly outline a system that I think would actually work to accomplish the goals UEFA has set out for this program. They are based on sticks and carrots that have worked extremely well in American sports, and ones that only make minor adjustments to the current system in the name of better achieving the overall goals the FFP program was designed for.

A Better FFP
When designing any system, you need to have clear and distinct goals for what you are trying to accomplish. From that point, you build incentives and punishments in to encourage actors to meet said goals. This is true for computer and board games, it’s true for international financial systems, and it’s when addressing financial fair play and football.

UEFA has stated that the design of FFP is to cause clubs to better live within their means and to prevent them from going bankrupt. This is a laudable goal, because far too many football clubs in Europe currently have massive debt, much of which is actually owed to their owners, either for loans, or for leverage they used to buy the club in the first place, or for years and years of sketchy financial management in the pursuit of trophies.

That said, is levying monster fines – to be paid directly by club owners – actually helping with that? £50Mis a lot of scratch, even to sheiks and oil barons, but does that fine do anything to help the clubs be self-sustaining?

There’s a second concept about UEFA’s FFP that we need to keep in mind though. We keep hearing about how clubs who were directly impacted by a team’s lack of FFP compliance can appeal to UEFA for uh… things. What they are appealing for exactly, we don’t know (and it looks as if they aren’t going to be awarded a high place in European competitions as part of a swap deal), but the concept is there.

Presumably, if a club (or multiple clubs) in violation of FFP qualify for the Champions League, they likely have a competitive advantage over those who are compliant. Is that competitive advantage costing those other clubs prize and TV money from the Champions League? Does it impact their ability to attract talent, which in turn impacts gate receipts? Potentially yes, otherwise it wouldn’t be a consideration in the program.

So if there is a direct financial impact when a long-term, non-compliant club replaces compliant clubs in the Champions League and Europa League, should the clubs who miss out get financial compensation?

Additionally, it’s not just teams that miss out that are financially affected. If an FFP violator finishes higher in the league table than a compliant club, they also get a bigger portion of the country TV pool from UEFA as a result, which is another potential financial impact to consider.

What Are the Goals of the FFP System?
1) To lessen the chance that teams will go bankrupt by forcing them to buy and spend more within their means.

2) To make certain there is some form of compensation for teams who miss out on European places due to non-compliant teams taking their spots in the Champions and Europa Leagues.

So those are our two primary goals based completely on UEFA’s stated goals and the potential for filing appeals and protests to settlements. However, I feel like there are secondary goals that also need to be addressed either directly or implicitly.

Sub Goal 1) To allow owners of clubs to invest heavily in their clubs for a period of time, with an eye to becoming compliant in the medium and long terms.

FFP was phased in slowly to allow exactly this. It would be harsh and unfair to lock down new owners who did not fall directly within the initial FFP umbrella from spending money to improve their clubs. We want owners to do this. Investing in a club, whether it be the stadium, the academy, the training ground, or in better players and coaches, is to be encouraged. However, they need to do so in a way that doesn’t put the club in danger of going bankrupt, or completely disrupt finances for other teams in the league for the future.

Sub Goal 2) Clubs that are consistent violators of FFP regulations need to be punished in a way that makes them want to stop violating those regulations as quickly as they can.

Aha! This is the tricky one that needs care in figuring out the best way to wield the stick with regard to FFP violators.

Proposed System
As I said above, this current system isn’t that bad. Fines/taxes for violating FFP can actually be a good deterrent in the right system, and the additional wage and roster restrictions UEFA has put in place will be a serious headache for most clubs. The fine levied on City and PSG is massive in footballing terms, even if it doesn’t particularly dent their owners’ bankroll.

That said, the really big thing that matters here is: What to do with the money?

I talked to football’s most-connected journalist Gabriel Marcotti about this briefly, and he said he thought UEFA would use the fine money to increase prize payouts to CL and EL competitions, as well as increasing contributions to grass roots programs. I’m all for increasing grass roots money, but increasing CL and EL payouts seems ridiculous.

If the presence of FFP violators in European competitions is directly affecting the teams around them in the domestic leagues, then shouldn’t the bulk of the fine go to them?

A Quick Word About the NBA
America is obviously a different place than Europe, and though they are equally sports mad, all of the major leagues in the U.S. operate under a single entity umbrella that negotiates National TV deals (outside the NFL, clubs do their own local deals), rights packages, and agreements with player labor unions. Each team is owned by a different ownership group, but the league is empowered to make a ton of decisions directly for the good of the product itself. Nowhere is this more true than the National Basketball Association.

Now, NBA owners were rampant overspenders for years. Dumb contracts in the league abound, and at some point they cleverly built a soft cap and a luxury tax into their labor deals to prevent owners with super-rich franchises (like the New York Knicks and Los Angeles Lakers) from leveraging their enormous financial might to the detriment of teams in smaller markets like New Orleans and Milwaukee.

Sound familiar?

The soft cap and tax did not prevent owners from spending, but what it did was taxed the owners who did spend big money beyond the soft cap number and redistribute it to the teams in the league who were under the salary cap.

Let me tell you, there is nothing that owners hate more than writing checks to other owners in their league who are being cheap. And they especially hate to do this when said “cheap” teams finish above them in the league table. This is especially true when you have the side effect of making those teams more competitive in the process.

But the cap and tax had the impact the league as a whole wanted. Player wages as a percentage of overall revenue went down, teams that were constant luxury tax payers tightened up their spending, and the value of teams in the league went through the roof.

It’s been stated in the media many times that one of the long-term goals of the Premier League owners is to get wage spending under control. Unfortunately for those owners (who are all rich, by the way), the structure of the Football League itself combined with European labor laws makes this a lot more complicated than it is in the U.S.

Anyway, I digress. To recap: NBA, soft cap and tax, BIG impact on rich owner spending.

Back to Football
If you are going to fine FFP violators large amounts of money, it makes the most sense if the bulk of the money goes back to the domestic league the violators are from as a sort of redress for skewing the financial situation and competitiveness of the league.  This takes a fine and turns it into a progressive taxation scheme for frequent financial violators.

The devil is obviously in the details here, but given the fact that City were an average, midtable side in the years before they started their massive spending spree (14th, 9th, 10th from 2006-2009), there’s a reasonable argument that their current spending has cost teams like Tottenham, Liverpool, Everton, Newcastle and the like tens of millions in Champions League money in the process.

The simple solution to this issue is to give most of the fine money back to the teams who lost out because of the new financial imbalance. However, add the caveat that fine money will only be distributed to teams who are themselves FFP compliant.

This has a three-fold effect.

A)     It punishes FFP violators in a way that is now distinctly uncomfortable. Not only are they paying fines, but the fines go directly to their competition.

B)      It attempts to repair damage to a league that occurs when a couple of teams become huge spenders, which either wrecks the competitiveness of the league (see PSG and Ligue 1), or forces all the other teams to spend vast amounts more simply to try and maintain the status quo. [Note: In the six seasons from 2006 to 2012, Ligue 1 had five different teams win the title. With PSG and Monaco obliterating the financial structure of the league, how long will it be before that happens again?]

C)      It incentivizes all teams in a league to be FFP compliant, should they wish to partake of any current or future fines handed out from UEFA. This has the beneficial trickle-down effect of nudging clubs everywhere to comply with UEFA financial regulations whether they are in a European competition or not.

Obviously this doesn’t matter in a league that has no teams breaching FFP, but that’s kind of the point. In that type of utopian football setting, UEFA is already content, even if the majority of the footballers themselves are the result of secret cloning experiments based on Maradona’s DNA. (Or potentially in the next generation, the fact that Raheem Sterling has sired children with all native English women.)

Conclusion
So there’s my simple take on a change that would take UEFA’s current FFP system and switch it to something that actually matters. Tax/Fines systems can work incredibly well, if you are providing the proper incentives for all teams to comply.

The system proposed above allows new club owners to invest in their clubs (this increasing interest and long-term franchise potential of buyers and sellers) initially, but then expects them to come in line with UEFA regulations. If they don’t, it fines them in exactly the same way as we are currently seeing in the City and PSG proposals, but it makes certain that those fines are distributed in a fashion that is really annoying to the violating team, and which takes direct steps to repair some of the damage done by the FFP violations themselves.

 

Article by Ted Knutson