This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
In May 2010, the UEFA published a new club licensing and financial fair play regulations (UEFA, 2010). The new regulations have been approved by the UEFA committee, who aims to utilize new principles to assess clubs' financial performance in order to improve their financial positions. There is an essential implementation process will be conducted over three years. At the end of 2012, clubs must fulfill the "break even" requirements, and then their financial statements will be assessed in the 2013 financial period. If any club does not fulfill the criteria, it will be punished. The UEFA president Michel Platini (2010) stated that "We have worked on the financial fair play concept hand-in-hand with the clubs, as our intention is not to punish them but to protect them". However, Michel Platini (2010) also claims financial fair play regulation is a "zero tolerance". Therefore, European clubs have to follow this regulation with their sacrifice on finance or pitch. The conflict between UEFA and clubs has appeared gradually due to the financial fair play rules.
This essay will be split into three parts. Firstly, the reasons of financial fair play introduction will be analyzed. Secondly, the UEFA's problems will be assessed, which are in the process of the financial fair play implementation. Furthermore, the clubs' issues will be presented and this author will give some recommendations for clubs at the end. Finally, the conclusion will briefly conclude and predict the financial fair play rules' future.
Background and reasons
With the financial crisis sweeping across the economic world in 2008, the financial issues surrounding football clubs have become more concerned. The UEFA general secretary Gianni Infantio (2010) stated that many football industry participants have to calm down due to the financial crisis. They have started to think about financial issues for future. At this time, financial fair ply rules have become more necessary than any time before. The UEFA president's advisor William Gaillard also claims that fortunately, they were happened in the same time between financial fair play measures and the financial crisis, this was a lucky timing of financial fair play released.
Despite that the financial crisis happened at the same time when financial fair play was published, the main reason of financial fair play introduction should be the annually worse situation of European clubs' debt. The chairwoman of the culture and education committee, Doris Park stated that financial crisis has affected every aspect of economy. For football industries, majority clubs' debt issues were a result of the financial crisis event. According to the European club football landscape report (2008), 47% of European clubs operated losses and 57% of European top division clubs operated losses. The total amount of top division clubs' losses was 578 million. Moreover, some worst clubs significantly cumber with the whole performance of European clubs. For example, the worst 20 clubs almost have done 70% contribution for the total amount of European clubs losses and these worst 20 clubs' losses dramatically reached 344 million before transfer cost. If transfer cost and other items are included, losses will exceed 735 million. Fortunately, the revenues of European clubs were always increasing and the total amount of top clubs' revenue has reached new record of 11.7 billion in 2009. However, unfortunately, in the same year, the losses of these clubs increased much faster than revenue, which has doubled the previous record to 1.2 billion (Gianni I, 2010). Therefore, financial fair play rules were launched by the UEFA due to the general difficult and unstable financial positions of European clubs.
According to the European club football landscape report (2008), European clubs' losses are a result of massive wages and transfer fees. In the financial period of 2008-2009, the wages cost of European clubs' employee and players increased rapidly by 18% reached 7 billion. At the same time, the interest cost also increased rapidly by 10.6%. Furthermore, the total expenses of the ten highest spending clubs in Europe cost 1820 million on wages and transfer cost, and this figure was almost two times of the total spending amount of next ten clubs, which were from 11th to 20th.
Taking Premier League clubs as an example, according to recent accounts, only 6 Premier League clubs made profits. Moreover, according to the European club football landscape report (2008), the total loans of Premier League clubs is more than the aggregate of other clubs in Europe's top divisions. The aggregate of Premier League 20 clubs' net transfer was GBP 837m in the period from the season 2007-2008 to 2010-2011. Comparing this amount of transfer spending with the last period from season 2003-2004 to 2006-2007 has increased by 38%. (EUFA, 2010)
In the wages cost aspect, Premier League is also the highest in the "five big" leagues' wage breakdown over 13 years.
From the chart above, it is easy to see that the Premier League clubs' wage costs are always the highest in the "five big" leagues. The important figure of wages/ revenue ratio increased from 48% to 67% over the last 13 years. According to the Deloitte (2010), if clubs' wages / revenue ratio is under 55%, which is an effective cost, 70% is a warning level and 100% is a danger level. Fortunately, the wage/ revenue ratio of Premier League is always under the warning level of 70%. Compare with Bundesliga, Bundesliga performed much better than Premier League in the ratio of wages / revenue with a stable around 50%. The Italian Serie A has already exceeded the warning level. Therefore, UEFA realized by this tough wages cost situation to control European clubs wages level through financial fair play rules. At the same time, "salary cap" has been started to discuss by some clubs staff and UEFA official. For example, Arsenal CEO Ivan Gazidis claims that European football should study US NFL and baseball's salary cap policy, which will be benefit for European football. In fact, Salary cap has not been practiced in European clubs. However, some critics believe that the salary cap system will be accelerated by Financial Fair Play rules. Furthermore, Platini (2010) also said "the rules to make clubs in European competition only spend what they earn were a sort of salary cap". Therefore, salary cap system will be fulfilled in the future in Europe.
Financial fair play
The purposes of Financial Fair Play are:
"a) to improve the economic and financial capability of the clubs, increasing their transparency and credibility;
b) 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 punctually;
c) To introduce more discipline and rationality in club football finances;
d) To encourage clubs to operate on the basis of their own revenues;
e) To encourage responsible spending for the long-term benefit of football;
f) To protect the long-term viability and sustainability of European club football."
Financial fair play regulations aim to protect European football. They also can help the competition of European football to keep integrity and sustainable. Moreover, the long-term investments will be encouraged by financial fair play regulations to improve the fundamental items of clubs. For example, long-term funding will be used to develop football clubs' academies and infrastructures. According to the deeply details of the financial fair play regulations, the financial fair play regulations will adopt series principles to control and monitor the clubs' behaviors of excessive spending on players transfer and players wages in order to keep clubs financial healthy. Moreover, the UEFA's head of club licensing Andrea Traverso claims that financial fair play rules encourage clubs' spending are less than their revenues, and this is also the key conception of financial fair play regulations, which is "break even" requirement. Furthermore, European clubs will not only fulfill the "beak even" requirement, but their wages and debt level also will be considered as a criterion in order to keep European clubs financial risk as low as possible. UEFA believe that financial fair play regulations will be much benefit for financial stability of European football over long term.
The implementation of financial fair play rules
In the implementation aspect of financial fair play. UEFA adopted to launch a club financial control panel to assist financial fair play to be approved. The former Belgiam Prime Minister Jean-Luc Dehaene has been named as the chairman of the UEFA club financial control panel. Nowadays, the panel's job has become a core element in implementation of financial fair play regulations' success. The main mission of this panel is to inspect and educate club about the financial fair play regulations in order to help clubs to improve their financial fairness in the competitions of European. Another function of the UEFA club financial control panel is monitory. They receive update principles of each club for different financial period, then to survey whether these clubs fulfill their balance of books or "break even" requirement. Therefore, the UEFA club financial control panel is the key fool of financial fair play regulations for successful implementation.
In the process of financial fair play rule's implementation, the UEFA faced or will face some issues unavoidably. Firstly, the legislative authority is an essential issue. UEFA is not a legislative body organization so their financial fair play regulations' powers will be not authoritative enough to be accepted and followed by every club in different European countries. Furthermore, the financial fair play regulations are involving many items such as law, accounting, economic and political policy so it is hard to harmonize with other domestic rules and regulations. In addition, the chairman of UEFA Platini has said financial fair play regulation is "zero tolerance" policy, if any club does not fulfill this regulation it will be kicked off European competitions. Therefore, the UEFA needs an absolute power to support financial fair play regulations' implementing. Otherwise, there are some unfulfilled clubs will question or challenge UEFA's and the financial fair play regulations' authority. Therefore, UEFA tried their best to receive the support and approval from the European Parliament. Fortunately, they have already got European Parliament as the powerful supporter (UEFA, 2010).
Massive data analysis
The massive job of inspection of clubs' financial statements is other issue. Nowadays, UEFA has become a huge financial data store in the world due to the clubs' financial statements submitted in the financial fair play regulations preparation period. Numerous financial data need to be analyzed and verified. This is a really huge and complex job because of the time consuming, huge human requiring and massive funding requiring.
The UEFA have to face financial accounting trickery of some specific clubs. These "clever" clubs might try to scheme some methods to challenge or beat financial fair play rules. Mainly, these clubs will have two kinds of cheating method. First method is the choosing of amortization. The transfer deal normally is recorded on account like this, when a purchase expense of player is recognized, this purchase expense will be capitalized on present annual balance sheet and this amount of purchase expense will be amortized over the whole length of this player's contract period. From what this author has mentioned above, UEFA financial fair play rules' implementing steps are that firstly, clubs should fulfill their acceptable deviation level preparation for financial fair play rules. Secondly, clubs must fulfill "break even" requirement at the end of financial period from 2012 to 2013, otherwise, will be punished. Therefore, clubs signed big deal of purchasing players recently, which was undoable to impact significantly their financial performance over the financial fair play rules inspection period. If the club that just have done purchase deal decides to write down all amount of this transfer spending as a cost in one year, it will not impact their financial performance at the end of 2012-2013. However, if the club still chooses to amortize this transfer spending, it will absolutely produce negative impact for their future cost. For example, Chelsea spent £50 million and £21 million to purchase the talents of Fernando Torres from Liverpool and David Luiz from Benfica respectively is obviously departed UEFA financial fair play rules' direction. In the 2010 winter transfer market, Chelsea received two talents, but they also bear a huge financial weight for future. Choosing Torres as an example, according to his £50 million transfer fee and the length of his contract 5.5 years, the transfer spending is annually amortized of £9 million. Moreover, Torres's wages might estimate around £150,000 per week, which is worth £8 million per year, so Chelsea would spend £17 million totally for Torres. Obviously, Torres is a big annual cost for Chelsea. Therefore, some commentators suggested Chelsea should totally book this transfer expense as a cost in this financial period. However, UEFA has been aware this issue, so UEFA claimed this in Feb of 2010, the Head of Club Licensing and Financial Fair Play at UEFA Andrea Traverso (2010) clarified that "There is no doubt that transfers now will impact on the break-even results of the financial years ending 2012 and 2013 - the first financial years to be assessed under the break-even rule. All clubs must amortize all transfer fees."
Secondly, UEFA will face issue that several clubs might adopt to book a massive impairment provision in the financial period of 2010-2011 in order to make a better financial performance on account in the future. This method utilizes dramatically reduce the receiving possibility of receivable to prepare huge amount impairment provision. It can increase the profit possibility due to amortize annually the impairment provision as the income. Its advantage is useful for reducing future expenses. Although, UEFA have not claimed any statement for this financial trickery, the method of impairment provision does not look like to be approved by UEFA.
Acceptable deviation level
In the "phased implementing" period, UEFA allows clubs have acceptable deviation level. It is other issue for UEFA. Different club has different situation causes UEFA should different acceptable deviation level for every single club. It is hard to find a balance among European clubs.
"Friendly deals" among clubs and sponsorships is other issue for UEFA. Clubs intend to increase their revenue to fulfill the "break-even" requirement. If two "Friendly" clubs have a good relationship and one of them have financial issue, so other club buys a mediocre player with a talent price. UEFA has realized this issue, so released a concept of "fair value", which means "if an owner over-pays for services, this will be adjusted down to market value." (The Swiss Ramble, 2011). However, this price is truly "fair value" between these two "friendly" clubs. Moreover, it is hard job to definite how much is the "fair value". For example, Etihad sponsor Manchester city £25 million for a 3 years, this deal compare with last Thomas Cook's £2.3 million per year deal, which looks like "unfair". However, comparing with Aon pays £20 million annually for Man United, this deal become fairer. Another example, Pirelli is Internazionale's shirt sponsor, yet only pays â‚¬9.3 million per year. Comparing with Liverpool, Standard Chartered singed a worth â‚¬24 million a year deal with Liverpool, who even did not achieve Champions League qualification. This deal is quite low for a current Champions League holder. It is really "unfair". Furthermore, some rich boss might utilize their subsidiary to help clubs to gain more commercial revenue. Taking Internazionale as an example, Pirelli is his shirt sponsorship and Pirelli is also one subsidiary of Internazionale's boss Massimo Moratti. Therefore, Massimo Moratti can negotiate a "fair value" shirt deal with himself for improving Internazionale's commercial revenue. This is a new way to inject funding for his club without offending any regulation.
According to the UEFA financial fair play rules (2010), if your cost is used to youth development, it is excluded the relevant Expenses in the assessed process of "break-even" requirements. Following is the UEFA financial fair play statement about the youth development:
"Appropriate adjustment may be made such that youth development expenses are excluded from the calculation of the break-even result. Expenditure on youth development activities means expenditure by a club that is directly attributable (i.e. would have been avoided if the club did not undertake youth development activities) to activities to train, educate and develop youth players involved in the youth development programme, net of any income received by the club that is directly attributable to the youth development programme. The break-even requirement allows a reporting entity to exclude expenditure on youth development activities from relevant expenses because the aim is to encourage investment and expenditure on facilities and activities for the long-term benefit of the club." (UEFA, 2010)
Therefore, clubs spend massive amount of money on youth development in despite of nothing will be calculated on cost. This is a good way for club to increase their transfer income. The transfer income will dramatically increase from the sale of these home grown players. Moreover, there is no capitalized record on balance sheet these home grown players, so these home grown players' value will be almost equal the final profit received. Furthermore, this is also a good money saving method for clubs' transfer deal. Breeding their own home grown players to play game is always cheaper than buying players from other clubs. Therefore, financial fair play rules will dramatically encourage European clubs to invest much funding on youth development.
However, if huge clubs invest much funding for youth development, it might impact some small clubs, which live for selling players. From the benefit of financial fair play rules for youth development, it is easy to find that this is a profitable way for clubs, so all clubs will spend more money on youth development. Therefore, there are huge impact for some small clubs, which are relying on selling young players to survive such as Alexandra Crewe will face a significantly challenge. Furthermore, the huge clubs will invest more funding to breed young players, even the young players will not be needed for their squad. This is clubs' business for profit to sell their young players. If every huge clubs establishes their "talent factory" well in order to improve their financial performance on accounts, these small clubs' business spaces will be occupied a lot. Finally, "it could mean that smaller teams end up buying back players from Premier League clubs who they would otherwise have developed themselves." (Andersred blog, 2011)
Problems of Stadia
According to the UEFA financial fair play rules, the expenses of stadium development are excluded from cost. However, according to the European Club Footballing Landscape report (2010), there are still 65% of top division clubs are playing in stadiums owned by their municipal authorities in Europe. In fact, it is not every club owns a stadium, even some the rich clubs. Taking Manchester City as an example, the City Stadium of Manchester is not belonging to the Manchester City club, which is rented from the municipal council over 250 years. Manchester City has to share their gate income with the council as the rents. With the financial fair play rules are published, the stadium deal between clubs and council will change. Because the new rules Manchester City might invest more on stadium expansion. Therefore, European clubs will prefer spending on stadium development.
The financial Fair Play rules can help European football through financial ways. After the new regulations are published, European clubs have to save money on the transfer fees and players' wages in order to fulfill the new rules.
However, this new rules are not welcomed by everyone. Some huge clubs' bosses they do not wish their clubs can generate profit for them. They just want to achieve their reputation on pitch through their clubs. However, the new rules have impacted their performance on pith due to the restriction of transfer and wages. Therefore, Carlo Ancelotti said that after the 2010 winter transfer deal, "If you do not have the players, you do not have the possibility to reach the top. Now we have that chance." (swissramble, 2010)
In process the Financial Fair Play rules implementing, UEFA and clubs face many issues, because some conflicts between UEFA and some clubs. UEFA aims to develop European football through a long term perspective. However, these new rules damage some clubs' present benefits. Therefore, financial fair play rules face some issues.
Finally, it is this author believed that if every European football club could follow these rule of Financial Fair Play, European football's future will be better.