Financial Fair Play and the English Pyramid

An actual slide from the 2009 UEFA FFPR proposal powerpoint. Maybe.

You may have heard about the Financial Fair Play Regulations (FFPR). In the works since 2009, the rules are the sword which UEFA’s Michel Platini hopes will slay the dragon of financial excess in the European soccer economy. The legislation requires clubs to be financially break even or profitable without the help of cozy financing schemes (*ahem* ̶R̶o̶m̶a̶n̶  Sheik Mansour) while also maintaining or improving debt levels. The carrots offered to compliant clubs are reduced costs and financial stability, inducements which fall somewhere between an actual carrot and a package of underwear for Christmas. The stick that will compel clubs to fall in line is UEFA’s ability to deny entry to the Super Cup, the Europa League, and the Champions League. The glory and prizes are enough to give credence to Platini’s message: if you want to play at the highest level you will follow the rules.

Some doubt it, some are in denial, and some are depending on it, but FFPR is coming. What may surprise you is exactly where it is coming to and what will happen.

Why UEFA Should Crowdsource Financial Fair Play

The Great Financial Meltdown was preventable.  The post-mortem of the 2008 collapse has reiterated what is true of every man-made crisis, that they can be avoided.  The warning lights were flashing long ago and there was ample time to stop the bubble.  Robert Shiller knew,  Nouriel Roubini knew and plenty of others were sounding the alarm because they had the information to understand what was going on.  Currently soccer is depriving itself of its own early warning system because data on club finances, including player transfer activities and ownership is being kept out of supporter hands.  This needs to change throughout the soccer world and the best place to start is through UEFA.

Groupon, ManCity and the Credibility of a Regulator

Right now the Securities Exchange Commission and UEFA have more in common than they would think.  In the past month both have been confronted with situations that call into question their role and legitimacy as policemen of their respective neighborhoods.

Groupon Inc., the daily-deal site, is looking to sell shares in an initial public offering valuing the company at close to $20bn. 

Thoughts on Financial Fair Play, Part 1

I’ve listed some thoughts and questions I had about the new FFPR.  The full document is here and my summary of the most important points is here:

• UEFA is not just about soccer anymore, FFPR has transformed it into a financial regulator.  Effectively monitoring the financials of several hundred clubs and ensuring that enforcement is transparent and meaningful across the association are not easy tasks, just ask the SEC.  Is UEFA ready for that?
• UEFA is going to rely on the information supplied by auditors, and like other regulators will be open to potential misreporting.  What penalties are in place to ensure that auditors will not be pressured to distort results? 
• FFPR mentions little about penalties or enforcement.  What happens to clubs which misstate results? Accidentally? Purposefully? Are there financial penalties? Competition penalties?  It is worrying that none of these details are spelled out. 
• Creative bookkeeping seems inevitable.  There is going to be a large incentive to move as many costs as possible into the columns marked ‘Youth Development’ and ‘Stadium Construction’.  See entry about auditor pressures above.
• Valuation of Players.  How are clauses in player contracts going to be booked on the balance sheet? It could cause quite a lot of havoc for clubs with smaller balance sheets.  For example, Club A sells a striker to Club B for an upfront fee and a ‘payment after X goals scored’ clause.  Is the clause an asset for the selling club?  What about for the buying club, is it a contingent liability?  
• ‘Sugar Daddy’ limits.  Over the next seven years (2011-2018) the maximum amount that an owner will be able to subsidize a club will be EUR 105m.  Expenditures on stadium and youth development are still theoretically unlimited.
• Really break even?  The language of the first scenario that fulfills the Break Even Requirement is unclear.  It seems to say that if a club operates at a surplus for the first two years (T-2, T-1) of a Monitoring Period then the Break Even Req. is considered fulfilled.  Why would this be true?  Couldn’t a club have a much larger deficit in the current year and thereby cause an aggregate deficit without violating one of the indicators?
• Why not be consistent?  If the goal is to encourage steady management of finances taking into account two previous years in the case of a deficit over the current Monitoring Period seems counterproductive.  In fact it encourages ‘lumpiness’ by allowing a club to run a deficit for up to four years as long as it made a large surplus in one season five years ago.