Expert Column

Dr. Gregor Reiter, Partner, GRÜTER Attorneys and Notaries, Germany on \"UEFA\'s \'Financial Fair Play\' Concept - a Critique\"
UEFA's 'Financial Fair Play' Concept - a Critique

Through the “Financial Fair Play” Concept UEFA is seeking more financial stability for European clubs as well as trying to establish a level playing field amongst clubs in Europe in order to assure that success on the pitch can not be bought thru financial gambling in the offices surrounding the pitch.  UEFA fears that the football bubble – as has the rest of the European Economy since 2008 - will “blow” and will leave the European football world in turmoil, to say the least.
In order to be able to asses the potential success of the Financial Fair Play Concept, a first look needs to be taken on how UEFA is planning to achieve its goal. As far as the author makes legal comments in concern with the concept, these comments are based on the current legal situations for clubs in Germany.
The Concept of Financial Fair Play
The concept of Financial Fair Play was approved by UEFA's Executive Committee unanimously in September 2009. The principal objectives of the concept being:
• to introduce more discipline and rationality in club football finances;
• to decrease pressure on salaries and transfer fees and limit inflationary effect;
• to encourage clubs to compete with(in) their revenues;
• to encourage long-term investments in the youth sector and infrastructure;
• to ensure clubs settle their liabilities on a timely basis.
These approved objectives reflect UEFAs own view, that UEFA has a duty to consider the systemic environment of European club football in which individual clubs compete, and in particular the wider inflationary impact of clubs' spending on salaries and transfer fees.
UEFA considers with its concept the world wide economic situation since 2008, which also did create difficulties for football clubs in Europe. Many clubs – according to UEFA - have experienced liquidity shortfalls, for instance leading to delayed payments. UEFAs general secretary Gianni Infantino said that of more than 650 clubs throughout Europe, which had been surveyed, it had been found that 50% were making losses every year and 20% were making massive losses, spending 120% of their revenue each year.
The concept looks easy enough on paper and if you present the concept to any CEO of any company in Europe, most of them will probably tell you, that they have followed along these lines all their business life and if they would not have, they would have had to file for bankruptcy. Considering that most clubs – at least in Germany – are cooperation’s in the legal sense of the word and therefore had to follow most of the concepts bullet points anyway, one wonders, why UEFA needs this concept.
Introduction of more discipline and rationality in club football finances
It should be common in any cooperation, that business decision are not based on market issues alone. Whatever the market side wants, it must be restrained by what is financially possible and prudent. In order to achieve this, a club needs personal that is able handle financial issues with discipline and in rational ways; in the past clubs have in most cases entrusted the position of “manager” to ex-players with little or no experience in finances. If the club did have a CFO, he usually had to bow down to the wishes of the “manager”, thus the market dominated the financial side without restrain, leading – in some cases - to financial chaos. In March 2005 Borussia Dortmund came to the brink of insolvency, because they did spent money that they were hoping to gain in European tournaments, for which they ended up not qualifying for. On the other hand, the success of Bayern Munich of the past 40 years (!) is in part owed to the fact, that Bayern Munich has always shown discipline and rationality in financial issues and has strong personal in that field, conferring on equal terms with the sporting side.
Decrease pressure on salaries and transfer fees and limit inflationary effect
This is the “salary cap” issue. The question is, how will UEFA apply it. There are two ways of doing it: By either putting an overall cap on the salaries or by saying, salaries can only amount up to a certain percentage of the budget. Nonetheless – as the US shows – a salary cap does not prevent the salaries from going up, it moves to bargain level from an individual one to a collective one. However, in the US there are only two parties at the table, when it comes to bargaining the salaries – the league being the collective body of the club owners and the respective Players Association. European football is a triangular system with the clubs, the players and the Football Federations. Controlling salaries in football is a necessary step, especially so in a world after the financial crisis and a tool that, if it works, will lead to more financial fairness, whether or not the time is right remains to be seen. Furthermore, collective bargaining comes at a price currently unheard of in European Football: Player strikes and lockouts. The NFL has seen them in 1982 and 1987, the Major League in 1972, 1981, 1990 and 1994/1995 and the NBA experienced a lockout at the beginning of the 1998 season.
Further, it will be interesting to see, how UEFA plans to limit transfer fees, considering that after the “Bosman Decision” there are no transfer fees. What we refer to as a transfer fee is  payment offered to the current club, by the new club, in order to repeal a labour contract between the player and the current club. How can you limit such a payment? Certainly not thru a regulation passed down by an association. A statutory limitation thru UEFA might conflict with EU law, if a non UEFA club would not be limited by such a regulation.
Encourage clubs to compete with(in) their revenues
In Germany that encouragement is given by § 19 of the German Insolvency Code (“InsO”), if a company does not keep house within its revenue, it will loose money and that eventually will lead to overindebtness; the company than has to file for insolvency. If that is not done within three weeks, the CEO might face criminal and civil charges. Realty shows however, that not even the law is able to encourage the clubs to compete within their revenues. The German 2nd Division Club MSV Duisburg lost its playing license for the 2013/2014 season. In order to qualify for the 3rd Division, it needed to show the German Football Federation that it had the solvency for the 20143/2014 season. In order to be able to get the necessary solvency Duisburg was forced to take on more loans, which may have let to overindebtness by the end of its fiscal year.
Clubs – like any other cooperation – should – as it is required by the law – budget within their revenue, on the other hand as long as the solvency for the upcoming season is the golden calf around which the Federation dance, the clubs are determined to sacrifice sound economic behaviour in order to reach short term goals, i.e. the license for the next season.
Encourage long-term investments in the youth sector and infrastructure
Why does a concept concerning financial fair play need to encourage long term investments in the youth sector and in infrastructure?
No doubt that such investments are good for the future of the football sport and the clubs. However, when deciding whether to spend excess money into “stones” or “legs” a coach and a sporting director – both judged on their short term success - will probably go for the latter. It will therefore be up to the CFO to persuade the club board of investing in “stones” rather then in “legs”, which brings us back to the above described dilemma: Most clubs lack good CFOs.
Ensure that clubs settle their liabilities on a timely basis
It is amazing enough that such an implicitness is part of UEFAs Financial Fair Play concept. In Germany this ensured by § 17 InsO. If a cooperation does not have at least 90% of its due liabilities covered by liquid assets, it has to file for bankruptcy.
It will be interesting to see, how UEFA plans to enforce to timely payment of due debts. The only thing that UEFA can do is to withhold those payments due to clubs that either participate in the Champions or the Europa Leauge. In order for this to be more then a wish, UEFA will have to move towards a European Clearinghouse system, which handles all payments between clubs and which – being an independent body – control the clubs playing football in Europe financially.
Financial Fair Play is a good thing, but let us understand that insolvencies will be the “ugly side” of that concept.