Introduction: FIFA’s TPO ban and its compatibility with EU competition law.
Day 1: FIFA must regulate TPO, not ban it.
Day 2: Third-party entitlement to shares of transfer fees: problems and solutions
Day 3: The Impact of the TPO Ban on South American Football.
Day 5: Why FIFA's TPO ban is justified.
Editor's note: In this fourth part of our blog symposium on FIFA's TPO ban Daniel Geey shares his 'UK perspective' on the ban. The English Premier League being one of the first leagues to have outlawed TPO in 2010, Daniel will outline the regulatory steps taken to do so and critically assess them. Daniel is an associate in Field Fisher Waterhouse LLP's Competition and EU Regulatory Law Group. As well as being a famous 'football law' twitterer, he has also published numerous articles and blogs on the subject.
What is
Third Party Investment?
In brief
Third Party Investment (TPI) in the football industry, is where a football club
does not own, or is not entitled to, 100% of the future transfer value of a
player that is registered to play for that team. There are numerous models for
third party player agreements but the basic premise is that companies,
businesses and/or individuals provide football clubs or players with money in
return for owning a percentage of a player’s future transfer value. This
transfer value is also commonly referred to as a player’s economic rights.
There are instances where entities will act as speculators by purchasing a
percentage share in a player directly from a club in return for a lump sum that
the club can then use as it wishes.
Why did
the Premier League ban the practice?
The Premier
League, Football League, Football Association, the Polish and French leagues
have all brought in TPI bans. The original ban in the Premier League came as a
result of the Tévez affair where a third party owner had the contractual right
to force West Ham to sell the player if a suitable bid was received. This was
against the 'material influence' regulations that were in place at the time. Previously,
there was no express clause prohibiting TPI; only the act of influencing a
club’s policies or performance was forbidden. Tévez’s third party contract
contained a clause giving exclusive power to the third party owners, MSI and
Just Sports, to facilitate the transfer of the player. West Ham did not have a
veto over this right and such a stipulation breached the above Premier League
rule as it meant that outside parties had material influence over the decision
making of West Ham.
A common
misconception throughout and after the Tévez case was that any third party
player owner would have been in breach of the Premier League rules. This was
not the case. It was the clause giving the owners of Tévez influence over West
Ham which incurred the Premier League��s wrath (plus the non-disclosure of the
agreement itself). It was for this reason that West Ham was judged to have
breached the old Premier League rule Rule U18 and fined £5.5 million by the
Premier League.
Subsequently,
the Premier League significantly strengthened its regulations to prohibit any
type of TPI. Other leagues followed as a result. The Premier League decided
that from the beginning of the 2008/9 season an absolute ban on TPI was required.
A spokesman stated:
“The
clubs decided that third-party ownership was something they did not want to
see. It raises too many issues over the integrity of competition, the
development of young players and the potential impact on the football pyramid.
It was felt the Premier League was in a position to take a stand on this. No
one wants to see what has happened to club football in South America repeated
over here”.
There are also
Football League and Football Association rules prohibiting TPI but the below
analysis takes the Premier League rules by way of example. Current
Premier League Rules U39-40 (which at the time were rules L34-35) govern
the actual prohibition and buy-out mechanism.
Premier
League Rule U39 is the exemption rule which covers scenarios where clubs are
allowed to receive money or incur a liability, for example, for the player
registration or transfer of a player registration. Such instances include payments
or receipts of transfer fees, loan fees and sell-on fees, payments for image
rights contracts, payments for agency/intermediary work and payment of training
compensation and solidarity contributions as set out in the FIFA regulations.
Premier
League rule U40 is the mechanism to enable a third party owned player to
transfer to a Premier League club. This can occur so long as the Premier League
club purchases the third party’s economic interest in the player. It states:
"In respect of a player whom it applies to
register as a Contract Player, a Club is permitted to make a payment to buy out
the interest of a person or entity who, not being a Club or club, nevertheless
has an agreement either with the club with which the player is registered, or
with the player, granting it the right to receive money from a new Club or club
for which that player becomes registered. Any such payment which is not
dependent on the happening of a contingent event may be made either in one lump
sum or in instalments provided that all such instalments are paid on or before
the expiry date of the initial contract between the Club and the player. Any
such payment which is payable upon the happening of a contingent event shall be
payable within 7 days of the happening of that event".
This
ensures that any future transfer sums, should the player be subsequently sold,
would be kept by the selling Premier League club and eliminates any third party
element to any future sale transaction. Interestingly, the Premier League club
who 'buys-out' the third party interest may still be paying the third party
investor through installments during the period that the player is playing for
his new Premier League club. Whilst the player is owned by the club and no
third party interest is possible, there is still the eventuality that a club
could default on the installment plan and then the third party investor could
sue based on the buy-out obligations in the contract. It would be unlikely yet
is unclear from the regulations whether the investment stake could be
transferred back to third party investor if default occurred or what other
alternative recourse that an investor may have.
Nonetheless,
any player registered to play in the Premier League cannot be third party owned
by a TPI company. It means that the buying Premier League club has to satisfy
the football authorities that all other economic interests have been
extinguished. This occurred over the summer when TPI players Markovic and
Mangala were transferred to Liverpool and Manchester City respectively. Premier
League clubs undertake to the football authorities that it is the only entity
that owns the player’s economic rights and only then can the transfer can be
completed. It is likely that Falcao had a TPI contract whilst he was at Porto
but as the French league also prohibits TPI, when Monaco bought him, there may
well have been a requirement in place to extinguish any third party rights. As
such, when he was then loaned to Manchester United this summer, his TPI rights
would certainly have been extinguished to ensure there were no major
complications with his Premier League registration.
Why is
it such a problem?
As the Premier
League spokesman explained above, their major concerns related to integrity, youth
player development and money flowing out of the game. An internal FIFA report recently
concluded that TPI trapped clubs in a “vicious cycle of debt and
dependence” and “posed risks to players and to the integrity of the game”.
The main
concerns about TPI include:
1.
Conflicts of interests can potentially occur between investors, club owners,
agents and coaches. For example, what if the owner of Club A also owns an
economic stake in Player B playing against his club? What if an agent of a
manager who buys TPI players is also an advisor of a TPI fund? Regardless of
any actual conflict, there is certainly a perceived conflict which may damage
the image of the game, public confidence in integrity of competitions and even
lead to potential match-fixing or insider trading concerns. Questions continue
to be asked over the transparency of the TPI funds and what role they have, if
any, in influencing clubs.
2. Clubs
become reliant on such funding which in turn leads to dependence on external
owners to continue to assist in such financing arrangements. As such, TPI
encourages short-term profit making with economic owners looking to the club to
sell its players to realise their ‘asset’ ahead of purely on-field sporting
concerns. The consequence is that the rapid turnover of TPI players at certain
clubs means fans become less loyal to the players who know they will be
transferred when the right offer is received. Clubs are seen as a short term
‘speculation tools’ with the result that money leaves the football family.
Why is
the practice necessary?
To counter
the arguments set out above, the following points demonstrate are why TPI is so
vital for many clubs around the world.
1. A
growing number of clubs cannot compete with the larger commercial and
broadcasting deals of the bigger European leagues. Clubs in so-called smaller
European leagues, for example, need to leverage their assets and find
innovative ways to find competitive advantage for playing against teams in the
Champions League.
2.
Purchasing players is an inherently risky business. Clubs with less money to
spend would therefore usually be more risk-averse when having to invest heavily
in transfers. One way of limiting such risk, is to share the financial burden.
Therefore contracts are entered into between economic owners and clubs to
either help the club with the purchase price for a talented individual or free
up capital and ‘monetise’ a current players value whilst he still remains at
the club. In either event, the club benefits from external finance that
cushions the club’s position if the player is not a world beater. Both the club
and the fund then benefit if the player is a success through a large transfer
fee received that is shared according to the contract.
3. There
are various ways to alleviate conflict of interest, integrity and transparency
issues. Instead of banning TPI, many believe regulation through a transparent
approach to TPI by disclosing a register of interests would alleviate a number
of concerns as well as making TPI contracts available to FIFA/UEFA to ensure
‘material influence’ issues are correctly dealt with in the TPI contracts.
With FIFA
regulating to ban players who are third party owned, many are questioning
whether regulation of the practice rather than an outright ban would be
preferable. In addition, some believe that it is not a ban but total
transparency of the arrangements that is required. This could even be expanded
to include a list of the owners of such transfer rights. Such transparency
could allow the football family to scrutinise any potential conflicts of
interest between, for example, those who own the economic rights of a player
and those who also own a stake in a football club. With FIFA’s regulation
governing the TPI prohibition, UEFA and FIFPro have backed such a position too.
What is
the current state of play?
The current FIFA Rule Article 18bis of FIFA’s Rules on the Status and
Transfer of Players states that:
“No club shall enter
into a contract which enables any other party to that contract or any third
party to acquire the ability to influence in employment and transfer related
matters its independence, its policies or the performance of its teams.”
This was not a specific ban on TPI but a ban on a third party owner from
influencing a club’s employment or transfer related matters.
Throughout 2014, UEFA and FIFA made a number of public statements
concerning their aim to outlaw TPI. In September FIFA’s President Sepp Blatter explained
that:
“We took a firm
decision that [TPI] should be banned but it cannot be banned immediately there
will be a transitional period”.
FIFA then set up a working group to address the topic of TPI. At the time,
in their press
release there was no explicit mention of a ban but “to analyse all possible regulatory options in relation to this complex
practice and to make preliminary suggestions”. It was to the surprise of
many that in late December, whilst the working group was still debating several
possibilities that FIFA announced that they were to ban TPI globally. It is
important to set out the exact wording of the FIFA
circular to grasp the wide scope of the prohibition. Specifically, a third
party is defined as "a party other
than the two clubs transferring a player from one to the other, or any previous
club, with which the player has been registered".
"Article 18ter Third-party ownership of
players' economic rights
1. No club or player shall enter into an
agreement with a third party whereby a third party is being entitled to
participate, either in full or in part, in compensation payable in relation to
the future transfer of a player from one club to another, or is being assigned
any rights in relation to a future transfer or transfer compensation.
2. The interdiction as per paragraph 1 comes
into force on 1 May 2015.
3. Agreements covered by paragraph 1 which
predate 1 May 2015 may continue to be in place until their contractual
expiration. However, their duration may not be extended.
4. The validity of any agreement covered by
paragraph 1 signed between 1 January 2015 and 30 April 2015 may not have a
contractual duration of more than 1 year beyond the effective date.
5. By the end of April 2015, all existing
agreements covered by paragraph 1 need to be recorded within the Transfer
Matching System (TMS). All clubs that have signed such agreements are required
to upload them in their entirety, including possible annexes or amendments, in
TMS, specifying the details of the third party concerned, the full name of the
player as well as the duration of the agreement.
6. The FIFA Disciplinary Committee may impose
disciplinary measures on clubs or players that do not observe the obligations
set out in this article".
Article 18ter imposes a blanket global ban for TPI
specifically forbidding any entity that is not a club from being entitled to future
economic rights and/or transfer compensation. Whilst it has been explicitly considered
that the prohibition only comes into force in May 2015, agreements entered into
from 1 January can only be one year in length. This effectively reduces the
possibility of new TPI contracts being entered into. Interestingly, Sporting
Lisbon for example, recently announced that they had bought back a number of economic
rights contracts from third party investors. They presumably considered that
their position may well have been strengthened as a result of the new
regulations.
Nonetheless, existing third party contracts will continue
until expiry meaning that some players may still be subject to third party
investment contracts for a number of seasons to come. Such contracts will however be monitored through
FIFA's TMS system as any club will be required to disclose a valid third party
contract due to the mandatory disclosure obligations set out in paragraph 5
above. Such obligations are required to be adhered to in a relatively short
time period (by the end of April 2015). The result of such disclosure may be
that the contracts submitted to FIFA may themselves breach Article 18bis, for
example, regarding TPI material influence clauses. Clubs will be faced with the
obligation to provide all continuing TPI contracts to FIFA and will be subject
to disciplinary measures if they do not. There is now an added compliance
factor for clubs to adhere to under the new regulations and a variety of
disciplinary cases against clubs should not be ruled out.
Lastly, the Portuguese and Spanish leagues are reported to
have made a formal complaint to the European Commission, presumably assessing
that Article 18ter is contrary to the free movement and competition rules. They
will no doubt be arguing that the absolute ban that FIFA has imposed, is disproportionate
i.e. that there are less restrictive ways of achieving the same objective.
Many
have suggested that regulating TPI through transparency and disclosure
obligations is a better alternative than an outright ban. It will be for the
European Commission to decide whether to take the complaint forward and make a
more substantive assessment or to reject the complaint. It should be noted that
when the Premier League banned TPI, although there were some that argued that
the prohibition breached competition law, no one actually came forward to
challenge the regulation. A mere two months after FIFA announced the ban did
the two Iberian associations challenge Article 18ter. That suggests, as many
believe, that TPI has played an integral part in the way that clubs in those
leagues use finance to 'de-risk' transfers and compete against clubs in
associations with higher revenue generating capabilities. TPI has been an
essential financing option.
Conclusion
Whilst the Premier League, as a reaction to the Tévez
affair, made a strong policy decision to ban the practice in its league, a more
fundamental shift is occurring on the global stage. Football specifically is
very much in the European Commission's view with current Intermediary and TPI
complaints and a previous Financial Fair Play complaint that was rejected but
is now before the Belgian national courts. The TPI complaint will not be a
quick process and in the meantime, unless interim relief is sought, existing
TPI contracts will soon have to be lodged with FIFA and from 1 May, no new
contracts can be entered into. Whether the practice is banned for good is now
in the hands of the European Commission