UEFA Financial Fair Play Regulations in European Club Football - Case Study Example

UEFA Financial Fair Play Regulations in European Club Football Table of Contents Introduction 3 Evaluating in Terms of Financial Stability and Rat Race 4 Long-Term Regulatory Objectives of Financial Fair Play Regulations 5 Basic Licensing Regulation 5 Long-Term Regulatory Objectives 6 Improvement of Financial Stability 6 Regulating Influence of External Funding 7 Conclusion 8 Reference 9 Introduction Across Europe football clubs have enjoyed increased earnings and rising popularity considering all revenue categories since last decades. Higher attendances, higher merchandising and the increased price on the sale of tickets have helped the club in order to achieve revenue growth. Consumer’s relationship has also become beneficial from the club’s point of view. But suddenly the club spending, of which the wages of player are the largest component, has increased even faster than revenues. The annual financial results of top-division clubs in all 53 UEFA member associations became gradually worse significantly in 2010. So, the proficient football clubs across Europe have been experiencing considerable losses in spite of the sustained revenue growth. Moreover, quite a few clubs have shown substantial level of indebtedness. The long-term financial stability of most prestigious clubs is at risk. However, huge funding by benefactors and investors of football clubs is a means of keeping clubs alive and also of gaining influence on sporting performance by doing investments in valuable players. UEFA has ascertained that it will take action and, in addition to its existing licensing regulation, has also issued the Financial Fair Play concept. It has issued this concept under the name of “UEFA Club Licensing and Financial Fair Play Regulations Edition 2010”. Its main objective is to protect its long-term sustainability and viability, and to improve the financial performance of European Club Football. Financial Fair Play pursues many objectives; among them two are of major importance: The improved rules concerning overdue payables and the break-even requirement. Monitoring of the break-even requirement by the UEFA club will take place for the first time in the course of season 2013-14. Both provisions aims at encouraging clubs to settle their debts whenever due and to maintain financial stability by functioning within their means arising from revenues (Muller, Lammert, and Hovemann, 2012, pp.2-3). Evaluating in Terms of Financial Stability and Rat Race Hyperactivity is the clear description of an action of individual that on the combined level provokes a rat race. Rat race implies that the private return for extra speeds exceeds the extra output produced i.e. faster speed results in more wages to the individual. It also implies that the individual worker is motivated by the knowledge that at slower speeds, he should share his output with the workers having less ability but at faster speed he cannot share the output of workers of greater ability (Akerlof, 1976, p.603). Later on this theory has been applied to sport economics to explain the features of league competition. In relation of the hyperactivity it can be explained that the clubs in team sports inadequately overinvest in playing strength. Contrary to this, as explained by agency theory the basic problem is not that clubs do not sufficiently struggle, but the problem is they display too much effort. The reward mechanism within a league, gives individual clubs strong incentives so that they can heavily spend on players that can be covered by the total revenues jointly generated by the league. Clubs invest heavily in their teams with the objective of achieving incremental sporting success and therefore securing additional revenues. According to the individual pursuit for equally exclusive sporting success, clubs which are in the professional team sports are likely to spend too much on players, therefore resulting in an unbalanced profit & loss account, where expenses exceeds income. The issue is that overspending of one club along with the resulting financial downturn might cause negative externalities for other participants such as: hurting the expectation of the marketing of a league and joint production and bringing lower collective revenues. Due to overspending in playing talent, certain clubs can afford continual loss making, thus infecting others, who are trying to maintain with the competition by either increasing their expenses or increasing their risk exposure to such extent that they cannot sustain. This would lead to inadequate results for the league and in order to release appropriate regulation, commence the role for the governing body of a professional sport league. In the distribution of revenues according to the league positions, different measures have been chosen to influence the extent of hyperactivity. These includes: Licensing system, which is a regulatory requirement to stick to financial stability and input rationing, which corresponds to both financial and sporting motives of hyperactivity. Long-Term Regulatory Objectives of Financial Fair Play Regulations Basic Licensing Regulation Professional clubs have to fulfil certain minimum requirement as a condition for being granted a “UEFA license”, and therefore being eligible to take part in European Club Competitions. The licensors are to be reviewed annually by a neutral control and inspection company. UEFA intended to encourage the licensors to extend the licensing system, which was initially designed only for clubs which have qualified for European competitions, to all participants in the domestic top flight leagues. This projected proliferation proved a success. Out of 53, 48 member associations applied a national licensing system in 2011. Upon being granted a license for the national championship, the applicants who are successful can take part in UEFA’s club competitions, provided that they are competent to do so, on the pitch. Licensing regulation of UEFA club describe minimum requirement in five fields’ i.e. sporting, personnel and administrative, infrastructure, legal and financial criteria. Among them, only financial criteria are important here (Devecioglu, 2010). Long-Term Regulatory Objectives In addition to the licensing regulations serving to ascertain the reliability and smooth running of the competitions, a new fundamental regulatory objective has been defined by the Financial Fair Play of UEFA. The objective is to protect the long-term feasibility and sustainability of European club football (Szymanski, p.7). To achieve this fundamental regulatory objective, two different instrumental objectives can be identified. First, existing licensing regulation will be assisted by Financial Fair Play in improving financial stability of professional football clubs and ensuring integrity and smooth running of the competitions. In addition to this, it also includes protecting creditors of professional football clubs. Second, the concept of Financial Fair Play limits the possibility of excessive external funding and its impact on on-field competition. Several operational objectives have been implemented to reach these instrumental objectives within the Financial Fair Play Regulations. These are as follows: To limit the intensity of debt at professional football clubs. To promote professional football clubs that they should not spent more than they make income. To stop too much salary and transfer payment and. To support professional football clubs that they should settle their debt on time. The professional football clubs should be more transparent in their dealings with UEFA. So, in order to achieve the long-term regulatory objectives, the instrumental and operational objectives also need to be achieved. Improvement of Financial Stability Sometime it happens that the clubs generally fail to pay their employees on time or according to the term of their contract. A failure to pay wages troubles the integrity of sporting competition and therefore offends the fundamental idea of fair play. This is the infringement of the principles of ethical business. The new regulation which clearly includes the notion of Fair Play strengthens the counteractions of UEFA administration and national licensors. It does so, by introducing two additional cut off dates in addition to 31st December i.e. 30th June and 30th September. By this time, any club which is taking part in a UEFA competition should not have any undisputed payables and overdue to another club, social or tax authorities or the employees of the club. Regulating Influence of External Funding Introduction of the “break-even” rule is the main element of the Financial Fair Play Regulation. It requires that clubs are not at all allowed to spend more than what they earn in income and have to operate within their means. This does not mean that clubs are gratified to earn profits and it also does not mean that a shortfall is in general against the rules. As a football club’s financial performance depends on the sporting performance which carries the substantial degree of uncertainty, it is insufficient to require a positive break-even result every year. A positive break-even result is defined as relevant income minus relevant expenses. Therefore, requirement of break-even is not applied in regards to every single financial year, but it is applied with respect to the monitoring period covering three financial years and that are: the reporting period ending in the calendar year which the commenced by the UEFA club competitions and the two previous reporting period. In order to get the break-even result; the operating income, excess proceeds on removal of tangible fixed assets, finance income and profit from disposal of player registrations, broadcasting income and advertising commercial activities should be greater than or equal to the operating expenses, finance costs and dividends, amortisation of acquiring player registrations, cost of sales and employee benefit expenses (Szymanski, p.9). Conclusion The break-even requirement and the improved overdue payable rules which are issued to regulate the external funding influence and to improve financial stability are the cornerstones of UEFA’s approach in order to gain control over the pressure arising regarding the sustainability and viability and also over the poor financial performance of European Club Football. Reference Akerlof, G., 1976. The Economies of Caste and of the Rat Race and Other Woeful Tales. [online]. Available at: http://www.unc.edu/~shanda/courses/plcy289/Akerlof_Rat_Race.pdf. [Accessed 22 March 2013]. Devecioglu, S., 2010, UEFA Club Licensing and Financial Fair play Regulations 2010 Edition. Available at: http://www.academia.edu/419639/UEFA_Club_Licensing_and_Financial_Fair_Play_Regulations_2010_Edition. [Accessed 22 March 2013]. Muller, J.C., Lammert, J., and Hovemann, G., 2012. The Financial Fair Play Regulations of UEFA. Vol 7. No. 2. West Virginia University. Szymanski, S., An Assessment of UEFA’s Financial Fair Play Rules: Article 2-Objectives. [pdf]. Available at: http://www.playthegame.org/fileadmin/image/knowledgebank/Challengesforfootball_pdf/Stefan_Szymanski.pdf. [Accessed 22 March 2013]. Szymanski, S., An Assessment of UEFA’s Financial Fair Play Rules: Breakeven. [pdf]. Available at: http://www.playthegame.org/fileadmin/image/knowledgebank/Challengesforfootball_pdf/Stefan_Szymanski.pdf. [Accessed 22 March 2013]. Read More