*Written by Mr Bhaskar Vishwajeet.
Introduction
Financial Fair Play (FFP) were a set of rules introduced by the Union of European Football Associations (UEFA) in 2011 to promote financial stability and fair competition within European club football. The rules were developed in response to the increasing levels of debt and financial instability among European football clubs, which threatened the sport's long-term viability and posed a risk to the overall health of the football industry.
Under the FFP rules, clubs were required to balance their books and demonstrate living within their means. This meant that clubs could not spend more money than they earned through revenues such as ticket sales, sponsorships, and television rights. If a club was in breach of the rules, it would face sanctions such as fines, points deductions, or even disqualification from European competitions. One of the critical principles of FFP was the requirement for clubs to break even or achieve a "sustainable level of debt". This means that clubs could not accumulate debt over some time and had to balance their expenses with their revenues instead. To ensure compliance with this rule, UEFA established a series of financial monitoring and reporting mechanisms, including the requirement for clubs to submit annual financial reports and the use of independent financial analysts to review the financial health of clubs.
Another essential aspect of FFP was the requirement for clubs to adhere to strict limits on the amount of money they could spend on player wages and transfer fees. This was intended to prevent clubs from overspending on player salaries and transfer fees in an attempt to achieve short-term success at the expense of their long-term financial stability. UEFA has also introduced rules to limit the amount of money that clubs can receive in the form of loans and other forms of financing to prevent clubs from using outside sources of funding to circumvent the FFP rules.
FFP was met with a mixed response from the football community. Some praised the rules for helping to promote financial stability and fairness within the sport. In contrast, others criticized the regulations for stifling the ability of clubs to invest in their teams and compete at the highest levels of European football. One of the main criticisms of FFP was that it disproportionately affected smaller clubs, which may have struggled to generate the same revenue levels as larger, more established clubs. This can create a financial divide within the sport and make it more difficult for smaller clubs to compete with their larger counterparts. Another criticism of FFP was that it could create an uneven playing field within European club football, as clubs with larger budgets may be able to outspend their rivals and acquire the best players. In comparison, clubs with smaller budgets may be forced to rely on less expensive or less proven players. This can lead to a lack of competitiveness within the sport and make it difficult for smaller clubs to break into the top ranks of European football.
Despite these criticisms, FFP had a number of positive impacts on the football industry. The rules helped to reduce levels of debt and financial instability among European clubs and contributed to the overall health and sustainability of the football industry.
Pandemic-induced interruptions and reimagining financial regulation
In the wake of the COVID-19 pandemic, UEFA amended the FFP regulations to ease compliance burdens and regulatory checklists for clubs and management[1]. To that end, the Emergency Working Group (an ad-hoc body established by UEFA for the pandemic-induced contingency) proposed the following relaxations:
The Financial Fair Play (FFP) regulations have been revised to provide clubs with flexibility concerning the timely satisfaction of their transfer and salary obligations.
The revised FFP regulations allow clubs to adjust the break-even calculations to account for COVID-19-related loss of revenue (relevant for reporting in 2020 and 2021).
The assessment of the financial year ending in 2020 has been postponed for one season to facilitate club compliance with the FFP Regulations.
The most recent update to these FFP relaxations took effect in early 2022. Dubbed the UEFA Club Licensing and Financial Sustainability Regulations (CLFSR), the revised regulations are designed to provide more flexibility to clubs, particularly in light of the financial challenges caused by the COVID-19 pandemic maintaining the overall principles of financial sustainability and responsible spending. The FSR replaces the FFP paradigm and intends to ensure that clubs are financially sustainable and can operate in a financially responsible manner and to promote the integrity and stability of professional soccer leagues
The FSR also applies to clubs participating in national professional leagues adopting the regulations, such as the English Premier League, the Spanish La Liga, and the Italian Serie A.
The FSR consists of general principles and specific requirements that clubs must meet to be eligible to participate in UEFA competitions. These requirements cover a range of areas, including financial management, accounting, reporting, and transparency.
Some of the main requirements of the FSR are:
Financial management: Clubs must have a system of financial management in place that is designed to ensure the long-term financial sustainability of the club. This includes having a balanced budget and not being in debt to other clubs, players, or other stakeholders.
Accounting: Clubs must maintain accurate and up-to-date financial records and reports and comply with relevant accounting standards.
Reporting: Clubs must provide regular financial reports to UEFA and other relevant authorities, including annual accounts, balance sheets, and cash flow statements.
Transparency: Clubs must be transparent in their financial operations and disclose any significant transactions or changes in ownership or control.
In addition to these requirements, clubs must also meet certain minimum financial criteria to be eligible to participate in UEFA competitions. These criteria include:
Break-even requirement: Clubs must not incur cumulative net losses over a three-year period that exceed the amounts allowed under the break-even requirement, which is calculated based on the club's revenues and expenses.
Equity contributions: Clubs must have sufficient equity contributions from their owners or other acceptable sources to cover any losses that exceed the break-even requirement.
Financial guarantees: Clubs must provide financial guarantees, such as bank guarantees or letters of credit, to cover any outstanding debts or obligations.
Clubs not meeting these requirements may be subject to sanctions, including fines, points deductions, and disqualification from UEFA competitions.
The state of regulation in the Asian Football Confederation with a particular focus on India
The AFC club licensing system is established by the Asian Football Confederation (AFC) to ensure that clubs participating in AFC competitions meet certain standards of quality and professionalism. The AFC club licensing system covers a wide range of criteria, including sporting, infrastructure, legal, financial, and administrative aspects of club operations.
Under the AFC club licensing system, clubs must meet certain minimum standards to be eligible to participate in AFC competitions. These standards are designed to ensure that clubs are well-managed, financially stable, and able to provide a high-quality playing environment for their players and fans. The AFC club licensing system includes several categories of licenses, including professional, provisional, and youth academy licenses. Clubs must apply for the appropriate license to participate in AFC competitions and provide information and documentation to the AFC to demonstrate that they meet the necessary criteria. An objective of establishing such criteria is to monitor financially fair operations in all AFC-associated club competitions.
There have been attempts at replicating some of UEFA’s financial auditing methodologies in Asia. China, most recently, introduced sweeping changes to financial reporting and organisation in the Chinese Super League[2]. The Chinese Football Association introduced a salary cap and restricted any mid-season bonus announcements and adjustments to reduce the league's mammoth expenditure and intricate accounting practices. Clubs have also been asked to invest a part of their revenue in youth academies and to double down on informal contract management to avoid tax evasion. From a policy standpoint, these regulations aim to whittle the ballooning expenditure receipts generated by Chinese clubs. The AFC indicates that Chinese clubs are top of the table as far as expenditure is concerned, however, returns are not proportionate and innovation has stagnated.
In India the Indian Super League has had its fair share of issues. The Indian Super League (ISL) is a professional football league in India that operates on a franchise system. Ten teams participate in the league, representing cities from all over India. Each team is owned and operated by a private company, and the teams compete against each other throughout the season to determine the champion. In addition to the ISL, there is a second division known as the Indian I-League. The I-League is the second-tier football league in India, and the top teams from the I-League can earn a promotion to the ISL.
While the ISL is based on private franchising like the NFL, it cannot generate similar revenue streams. The AIFF instituted the franchising mechanism by signing an agreement with IMG-Reliance worth INR 700 crore, allowing the ISL to charge franchise fees from participating teams. This way clubs have to inevitably spend upwards of INR 10 crores to buy in to the league. This does not help clubs that already run pre-tax deficits and cannot recover the fees and marketing revenue despite significant growth in audience and merchandising. Case in point, FC Pune City shut down on the grounds of unprofitability in 2019.
The ISL has struggled with cost control, as the teams' expenses have consistently been higher than their revenues. None of the franchises in the league's first three seasons could turn a profit before taxes. Additionally, the total debt of the teams has grown significantly, indicating difficulties in managing debt. The first three editions of the league saw none of the teams making a pre-tax profit. The total value of debt in the league has swollen to INR 85 crores[3]. A significant chunk of the Premier League (EPL) revenue is generated through broadcast fees. In the EPL, teams earn broadcast revenue per season at a fixed rate that wanders between 46-88 per cent. In the 2020-21 season, for instance, Liverpool Football Club earned upwards of $300 million in broadcasting revenue alone[4]. The ISL lacks such a revenue stream for clubs. STAR’s stake in the founding of the league had led to nil broadcast fees on their part as a media partner. This has led to a waste of a possible income capitalisation scheme that could have profited the franchises and the league overall. Advertisement revenue, another income stream that could be split among the teams, is owned entirely by STAR. Franchises rely wholly on matchday ticket sales, merchandising and individual sponsor deals for sustainable revenue.
The ISL is also riddled with governance issues[5]. The ISL is organised by a holding company named Football Sports Development Limited (FSDL), a Reliance subsidiary. The issue with such an entity is that all administrative powers are vested in the organisational setup of FSDL. The EPL for instance, is a private company that the participating clubs wholly own. It has a board of directors and auditing agencies; however, all decision-making vests with the clubs that have equivalent stakes in the organisation of the company, i.e., the league. The recently introduced five substitutions per game rule is a result of intense lobbying and conflict between the clubs. This represents a contrast in governance structures. The FSDL’s autonomy in deciding the league's operation may be restricting the franchises from having a say in any administrative amendments or organisational developments that may inevitably affect the franchises themselves.
Lastly, the ISL does not have a detailed regulatory policy like FSR or the erstwhile FFP. While accounting and financial reporting standards exist and are regulated by the league to be in line with Indian standards, no framework that checks inequality exists. Jamshedpur FC, owned by the TATA group, has a stadium and significant infrastructure that makes the other franchises powerless in comparison. Stadia act as a revenue stream to lease during the off-season for other activities. None but Jamshedpur FC enjoy this luxury.
Furthermore, Mumbai City FC enjoys being a party of the City Football Group (CFG). This global sporting behemoth owns successful and lucrative clubs like Manchester City FC (EPL) and New York City FC (MLS). CFG operates on a model of personnel sharing and as a result players playing for any team that is a part of the portfolio have exposure to the global infrastructure, network and opportunities that CFG curates. Hyderabad FC has a similar arrangement with Borussia Dortmund FC (Bundesliga). It is evident that power and resources are concentrated in some teams leaving out the majority. This can manifest in unfair practices and anti-competitive behaviour in the transfer market and organisational developments. Recently, Paris Saint-Germain, Inter Milan, Juventus, Roma, AC Milan, Marseille, Monaco and Besiktas were fined €172 million by the Club Financial Control Body (UEFA) for not complying with the break-even requirement for the 2021/22 UEFA club competitions[6]. The break-even rule stipulates the difference between relevant income and expenses of a club. The club meets the requirement if the combined break-even result is positive. The club has a combined deficit if the combined break-even result is negative (below zero). The rules set an acceptable level of deficit for a club[7]. Violations are met with stern fines and prohibitions like a reduction in squad sizes, as was the case with Manchester City in 2015-16[8].
India does not have a regulatory mechanism of this sort. The AIFF and its licensing bodies oversee the ISL. Despite glaring inequality, there is no separate body like the CFCB of the UEFA to oversee financially unfair practices and market abuse exclusively. This may lead to a top-down concentration of resources and eventually a stagnation in competition in the league.
Conclusion
In conclusion, the ISL needs to rethink policy mechanisms and governance to serve its audience and participating clubs better.
*The author is a Law Scholar, at Jindal Global Law School, OP Jindal Global University, India.
(The image used here is for representative purposes only)
References:
[1] ‘The Death of FFP, the Birth of FSR - Net Equity Rule’ <https://www.linklaters.com/en/insights/blogs/sportinglinks/2022/june/the-death-of-ffp-the-birth-of-fsr> accessed 25 December 2022
[2] ‘Footballers Lose out as Chinese FA Brings in Salary Cap’ (South China Morning Post, 21 November 2018) <https://www.scmp.com/sport/china/article/2174334/chinese-football-association-introduce-salary-cap-amid-raft-financial> accessed 25 December 2022
[3] Desk TB, ‘Moneyball: Analysing the Finances of the ISL and Its Franchises’ (6 July 2022) <https://thebridge.in/football/isl-clubs-finances-structural-problem-analysis-33028> accessed 25 December 2022
[4] ‘Liverpool FC Revenue Streams 2008-2021 | Statista’ <https://www.statista.com/statistics/251158/revenue-of-liverpool-fc-by-stream/> accessed 25 December 2022
[5] Globalsportspolicy, ‘The Indian Super League: A Comparative Analysis with the English Premier League’ (GSPR, 10 July 2021) <https://www.g-spr.com/post/the-indian-super-league-a-comparative-analysis-with-the-english-premier-league> accessed 25 December 2022
[6] Bray J, ‘UEFA Fine Eight Clubs for FFP Breaches and Place Man City on Watchlist’ (Manchester Evening News, 2 September 2022) <https://www.manchestereveningnews.co.uk/sport/football/football-news/uefa-man-city-ffp-fines-24919263> accessed 25 December 2022
[8] Conn D and Conn E by D, ‘Revealed: The Scale of Manchester City’s FFP Breaches before 2014 Uefa Deal’ The Guardian (22 January 2020) <https://www.theguardian.com/football/2020/jan/22/manchester-city-financial-fair-play-breaches-2012-13-accounting-sponsorships-uefa-champions-league> accessed 25 December 2022
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