Editor's Note: Christopher is an editor of the Asser International Sports Law Blog. His research interests cover a spectrum of sports law topics, with a focus on financial regulatory disputes, particularly in professional football, a topic on which he has regularly lectured at the University of the West of England.
It is five years since the Union of
European Football Associations (UEFA) formally introduced ‘Financial Fair Play’
(FFP) into European football through its Club
Licensing and Financial Fair Play Regulations, Edition 2012. With FFP having now been in
place for a number of years, we are in a position to analyse its effect, its
legality, and how the rules have altered over the last half decade in response
to legal challenges and changing policy priorities. This article is split into
three parts: The first will look at the background, context and law applicable
to FFP; Part Two will look at the legal challenges FFP has faced; and Part
Three will look at how FFP has iteratively changed, considering its normative
impact, and the future of the rules.
Background
Certain aspects of FFP were
incredibly controversial from the outset. To a neutral observer, this might
seem confusing: FFP is, ostensibly, a set of rules designed to make sure clubs
pay their bills on time, stay solvent, and do not need to look to external
benefactors to cover their losses. Leading sports economist Stefan Szymanski
described insolvency as “a
chronic problem in the world of professional Association football”, so, superficially at least, a regulatory
response to this would seem natural and appropriate. Where the market fails, it
is the regulator’s duty to respond.
UEFA’s President at the time,
Michel Platini, said “You, we, the fans and football lovers, have no interest
in seeing clubs, the real heritage of European football, disappear due to risky
management”. This is a sentiment with which most fans would agree.
Accordingly, UEFA incorporated
FFP into its existing licensing requirements, meaning any club that wished to
compete in a UEFA competition would be required to meet the financial standards
set by FFP. These standards would be overseen and enforced by a new body within
UEFA’s administration called the ‘Club Financial Control Body’. The Club Financial Control Body would be further
segregated into an Investigatory Chamber and an Adjudicatory Chamber.
So, why the controversy? The
contentious aspect of FFP was its ‘break even’ requirement. The ‘break even’
requirement is a de facto soft salary cap, tying the maximum amount a
club can spend (with defined exceptions) to its revenue generation. An overview
of the break even requirement as originally conceived can be found here. In essence, “The break-even result for a
reporting period is calculated as relevant income less relevant expenses’’.[1] “Income” includes
receipts such as gate receipts, sponsorship, broadcasting rights, commercial
activities and player sales; “expenses” includes wages, the cost of purchasing
players and the cost of finance.[2]
Crucially, when FFP was first
introduced, losses could not be met or offset by equity participants (i.e.
owners). This was pertinent to the prevailing financial climate in football, in
which certain clubs across Europe were spending unprecedented sums with the support
of wealth benefactors, who
would cover the clubs’ losses. Such spending was seen at clubs such as Chelsea,
Manchester City, Paris
Saint Germain, Monaco, Malaga and Anzhi
Makhachkala, with mixed
results on and off the pitch.
Thus FFP was accused of
calcifying football’s competitive hierarchy[3]
and foreclosing smaller clubs from sporting and consequent business success.
This debate has been played out over the last five years in the academic
literature[4] and in various legal
fora. The rules and the mechanisms for enforcing the rules have become
increasingly sophisticated as the years have passed. UEFA, perhaps in response
to these challenges, has made gradual, iterative changes to FFP that have seen
the rules soften to accommodate exogenous equity input in defined permissible
circumstances. These changes will be looked at in greater depth in Part Three.
The challenge of EU law
FFP has been described ‘legally
fragile’, which is an apt
description. This is because the rules cannot be said to be unquestionably
permissible under European Union (EU) law; nor can they be said to be
categorically in breach of EU law. The rules exist in a regulatory ‘grey’ area
– FFP, in its particularly in its original, more restrictive, guise, may
or may not have been illegal. This is a question for a competent (judicial)
authority to decide; however, as will be discussed in more detail in Part Two,
the route to such a decision has been far from straight forward, and in the
intervening years, FFP has changed substantially.
The essential legal questions
to determine the legality of FFP are:
- Does FFP
breach EU competition law?
- Does FFP
breach EU free movement law?
- Is there
a sanctuary for any breach of EU law under the doctrine of the specificity of
sport?
EU competition law
Article 101 of the Treaty of
the Functioning of the European Union (TFEU) prohibits agreements that have as
their object or effect “prevention, restriction or distortion of competition
within the internal market”.[5] This puts regulatory
associations such as UEFA in a difficult position. It is the very nature of
regulation that competition is restricted or distorted; indeed, it is the very
purpose of regulatory rules that participants subject to those rules alter
their behaviour accordingly, which has an inevitable consequence on the
competitive landscape.
Consideration should also be
given to Article 102 TFEU, which prohibits undertakings (and in some
circumstances collections of undertakings, i.e. oligopolies) that are in a
dominant position from abusing their market dominance.
In view of this friction, the
European courts have developed, through the case of Wouters, the concept of regulatory ancillarity.[6] This is the doctrine
under which, subject to a test of proportionality, reasonability and necessity,
even in circumstances where there is a prima facie breach of competition
law by a regulatory body (in that particular case by the Dutch Bar
Association), this may be permissible under EU competition law where the
regulatory body in question “could reasonably have considered that that
regulation, despite the effects restrictive of competition that are inherent in
it, is necessary for the proper practice of the [relevant profession]”.
The applicability of Wouters
to a sporting regulatory context is confirmed and clarified in the landmark Meca-Medina case. In considering whether a regulatory rule
breaches competition law, the European courts must determine:
- Whether
the rules are necessary for the proper conduct of the sport;
- Whether
the penalties are inherent to the restrictions in questions; and
- Whether
the effects of the rules are proportionate to the aims pursued.
Should UEFA be unable to meet
the test under the regulatory ancillarity doctrine, there is an alternative
exemption with a lower threshold to which it could look. Within Article 101(3)
TFEU, there is an exemption for agreements which promote “technical or economic
progress, while allowing consumers a fair share of the resulting benefit” as
long as such restrictions do not (a) impose on the undertakings concerned
restrictions which are not indispensable to the attainment of these objectives;
or (b) afford such undertakings the possibility of eliminating competition in
respect of a substantial part of the products in question.
It is open to UEFA to argue
that FFP dampens inflation in football in a way that is for the improvement of
the game and passes a benefit to ‘consumers’ (i.e. fans) by, for example,
reducing the need for ticket price increases to sustain escalating players’
wages. This would perhaps be difficult for UEFA to establish, but the economics
of FFP are complicated and second order effects should be borne in mind.
EU free movement
– workers, services and/or capital
The EU is built upon certain
deeply enshrined freedoms. These include the free movement of workers (Article
45 TFEU), the free movement of services (Article 56 TFEU), and the free
movement of capital. Any agreement that acts as an impediment to these freedoms
is susceptible to a finding of illegality.
In order to be permissible
under EU law, any rule or agreement that restricts any fundamental freedom must
be:
- Justified
by a necessary objective in the general interest;
- Suitable
for achieving that objective; and
- Proportionate.
In the case of sporting rules,
the European courts have determined that the rule in question must not “go
beyond what is necessary for achieving the aim pursued”,[7]
which is to reiterate that it must be proportionate – a recurrent theme in
considering the legality of rules made by the governing bodies of sport, such
as UEFA.
The criteria to be met by UEFA
in establishing that FFP does not breach EU fundamental freedoms is in line
with the threshold to be met in establishing compliance with EU competition
law: FFP must be necessary, suitable and proportionate.
However, in the case of free
movement law, it is far from obvious that FFP will have a substantive impact on
fundamental freedoms. In previous writing on the subject, I have made the
following analogy:
The restriction does not emanate from the rule per se, rather by the size of the club’s turnover; players are no more
restricted from moving between clubs by FFP than this author is denied a
Ferrari by his credit rating.[8]
The specificity of sport under EU law
In the event that a competent
adjudicative authority makes a prima facie finding that FFP is in breach
of EU competition law or EU free movement law, there is still a possibility of
an overall finding that FFP is not illegal under the doctrine of the
specificity of sport; however, this would require the adjudicative body in
question to row back considerably from the current position, and general
trajectory, of the level of latitude granted to the governing bodies of sport
by the European courts.
The concept of specificity
will be familiar to all those with an interest in sports law and policy. It is
the hypothesis under which, at its starkest interpretation, suggests governing
bodies, not courts (or governments or other legislative bodies), are best
placed to determine how sport should be run. Sports, it is argued, should have
rule making autonomy. A more moderate view on specificity holds that due regard
should be paid to the idiosyncrasies of the sports sector and the legitimate
governance function played by governing bodies.
The role of sports governing
bodies, whose rules, as was the case with FFP, are often enacted in a broadly
consensual way, with engagement, input and consent from key stakeholders,
should be acknowledged and some due reverence should be paid to governing
bodies' ability to regulate the sporting aspects under their aegis.
Indeed, the European Union had
no express competence to in respect of sport until the introduction of Article
165 TFEU, a soft competency, which states that, “The Union shall contribute to
the promotion of European sporting issues, while taking account of the specific
nature of sport, its structures based on voluntary activity and its social and
educational function.”
However, the distinction
between elite football as being ‘purely sport’ and elite football as a business
has become blurred in to the point of being indistinguishable; and the EU
clearly has express competence to deal with business.
The general trend in decisions
of the European courts has been to circumscribe self-determination by the
governing bodies of sport. Through cases such as Bosman,[9] Meca-Medina,
and Bernard,[10] the European courts
have made it clear that sport cannot avoid or cherry-pick the applicability of
EU law. This is acutely relevant in the case of FFP, which, after all, deals
with how football clubs are run financially. There are obvious sporting
consequences to this, but it is difficult to characterise FFP as anything other
than a rule restrictive of the business of sport.
UEFA’s
position on Article 165 is
that “while sport is not ‘above the law’, there is now a provision in the
Treaty itself recognising that sport cannot simply be treated as another
‘business’, without reference to its specific characteristics”. This is not an
unreasonable position; sport is a unique industry in which, unlike other
industries, the survival of competitors is important for any given club to
flourish. Perhaps the courts could be persuaded that a carve-out based on
specificity should be applicable to FFP – but this would require a seismic
change of direction.
So it is incredibly unlikely
that specificity as a discrete sui generis doctrine would give sanctuary
to FFP were the rules deemed to be otherwise in breach of EU law. However,
facts peculiar to the football industry (i.e. its specificity) should be
considered as part of an assessment as to whether FFP is a proportionate
mechanism to pursue UEFA’s objectives. As noted above, proportionality is a
limb of the tests for derogations to EU competition and fundamental freedom
law.
I have
previously commented that:
For
football clubs, there is a strong correlational link between spending money and
playing success. This has encouraged clubs to risk financial vulnerability in
pursuit of improved match results, despite the mathematical impossibility of
all clubs being able to improve their fortunes on the field. This innate
instability has resulted in persistent insolvencies despite the remarkable
growth in turnover seen in the professional game. Regrettably, when balance
sheets weaken, the risk of insolvency increases; and once a club becomes
insolvent, its survival is subject to the predilections of its creditors. The
game’s governing bodies should aim to militate against…this volatility.
UEFA would doubtless argue
that, given the specific nature of the industry it regulates, instituting a
soft salary cap such as that implemented by FFP is a proportionate response. In
that sense at least, the specificity of sport might be of consideration in the
legality of FFP.
Conclusion
It is difficult to say with
any degree of conclusiveness whether FFP is legal or not. There are strong
arguments either way. The marginal nature of the legal position has been
problematic for UEFA and has undoubtedly led to the legal challenges to FFP
over the last five years, which are discussed in greater depth in Part Two of
this series.
The uncertain legal position,
and the challenges generated by that lack of clarity has also, in all
likelihood, shaped UEFA’s policy decisions as FFP has evolved in the years
since its inception. These are discussed in Part Three of this series.
FFP has certainly been fertile
ground for debate, and will likely continue to be so until such a time as there
has been a determinative, binding view of its legality. When or whether this
will happen remains to be seen.