What is the FFP rule and what’s wrong with it? (History, significance, and limitations of the FFP rule)

In this blog post, we’ll discuss the FFP rule in soccer player contracts.

 

One of the hottest topics in the European soccer market in the last decade is the contract of French soccer player Kylian Mbappe with French professional soccer club Paris Saint-Germain (PSG). On August 31, 2017, Mbappe, who had been linked to several big clubs, officially joined the club. According to the club’s official announcement, Mbappe’s transfer fee was an astronomical €180 million. Having already spent €220 million on Neymar, many expected the club to be sanctioned by UEFA under the FFP rule, which governs transfer fees, but the club’s rather crude way of avoiding punishment has led many soccer observers to publicly criticize the limitations of the FFP rule, saying that star players’ transfer fees are skyrocketing and there is nothing to stop them. But what exactly is the FFP rule, and how is it problematic? With these questions in mind, let’s take a look at the FFP rule.
First of all, what is the FFP Rule? The FFP rule stands for Financial Fair Play, and it’s a UEFA sanction that prevents soccer clubs from spending more than they earn. If a club breaks this rule, they are banned from competing in UEFA-organized competitions. At the height of their popularity, UEFA-organized competitions like the UEFA EURO and UEFA Champions League are some of the most important events in Europe for soccer clubs, both financially and in terms of prestige, so missing out on them can be devastating. In other words, the FFP rules prevent clubs in Europe from spending more than they earn, and the sanction of being banned from competitions limits the ability of owners to pump private money into their clubs.
Why was the FFP rule initially enacted? According to then-Uefa president Platini, it was to prevent clubs from going bankrupt due to over-investment. The English soccer club Leeds United is a prime example of this. Leeds United entered the Premier League, England’s top division, in the 89-90 season, finished third in the 99-00 season, qualified for Europe’s premier cup competition, the Champions League, and reached the quarterfinals of the competition. But the glory was short-lived, as Leeds’ players demanded higher wages after winning league and cup competitions, and the owner was forced to use all of his personal funds and bank loans to meet their demands. Add to that the fact that they failed to qualify for the Champions League the following year and missed out on the massive broadcast rights revenue that was dependent on it, and the club’s debt quickly ballooned, and they were forced to sell off their players in order to stay afloat, and they became a small club bouncing around the bottom half of the league. This behavior has given rise to the phrase “Leeds’ time,” a metaphor for a person’s short-lived glory days. Examples like Leeds United highlighted the need for association-level regulation of club management, and in 2009, the FFP rules were born. UEFA aimed to reduce the deficit of around €1.2 billion in 2009, and while it’s impossible for every club to be in the black, the end goal is to give clubs a foothold in their operations and open up the possibility of stable growth.
This was the original intention of the FFP rule, but in recent years, the meaning of the FFP rule has been interpreted differently. Currently, there are five main ways in which the FFP rule has been interpreted in European soccer. First, it continues to raise the overall standard of European soccer and ensures that all clubs continue to prioritize the development and management of youth players. With spending now aligned to revenue, the gap between clubs will slowly close, allowing them to compete on a level playing field as they focus on developing young talent and improving team tactics rather than buying star players. Second, ensure that clubs are well managed and organized. As with the Leeds United example above, the FFP rules will ensure that even if an organization falters, there will still be the financial cushion within it to bounce back. Third, adjust the club’s sports infrastructure to provide adequate, safe, and well-equipped facilities for players, spectators, and media. This will be a win-win for both the clubs, who will be able to focus on their bottom line, and the spectators, who will be able to support sports with better infrastructure. Fourth, it preserves the integrity and smooth running of the UEFA club competitions as no private capital is involved. Fifth, it will allow clubs in Europe to benchmark themselves in various categories, including financial, sporting, legal, and facility aspects.
However, the FFP rule has been criticized and still has a lot of room for improvement. In the early days of the FFP, there was a sense that UEFA was pushing the FFA rules without defining them in sufficient detail. Many in the soccer world believed that then UEFA President Platini was just paying lip service to get elected to the UEFA presidency. In fact, in the early days of the program, it was often pointed out that it was ineffective because all but the most popular English and German leagues (Premier League and Bundesliga, respectively) were in the red, and even within those leagues, there was a huge disparity in revenue between clubs. The lack of detail in the FFA’s rules also meant that there were too many loopholes for sanctions to be circumvented, the most obvious being club sponsorship. There was no way for the FFA rules to sanction club owners for investing their own or their affiliates’ capital into a club in the form of sponsorships, which we all recognize from soccer jerseys, and so-called billionaire owners were able to continue to operate their clubs as before. It was also criticized for not taking into account clubs that were already losing money.
In response to this criticism, UEFA made changes. The first thing they did was to refine the FFP rules. The previous FFP rules simply stated the broad outline of “spending less than revenues,” with little reference to the details beneath it. So UEFA released a revised version of the FFP rules in 2015, and the changes were met with positive feedback from the soccer world. A key example of this was the refinement of the deficit threshold, which was implemented in 2015, limiting the allowable deficit to €45 million for the 18-19 season and €30 million for the 18-19 season, after which clubs with a deficit would be banned from participating in UEFA-organized competitions. This was seen by the soccer world as a step in the right direction to bail out clubs facing financial upheaval. Secondly, the most criticized aspect of sponsorship deals through affiliates, UEFA has decided that contracts with entities linked to club owners or local governments will be treated as insider trading if they exceed 30% of the club’s total turnover. This does not prohibit the use of sponsorship deals, as many clubs need them, but it does prevent large amounts of privately owned capital from flowing into clubs in the name of sponsorship.
However, the rule change was not complete. There are still plenty of loopholes to get around the FFP rules, and there are still a number of controversial points in the refinements. One such example is the Kylian Mbappe transfer mentioned at the beginning of this article. How was PSG able to formalize the transfer of Mbappe without being sanctioned by the FFP rules? PSG used a loan transfer. The way we usually recognize transfers in soccer is an outright transfer. A player moves from one team to another for a transfer fee. However, a loan transfer is a contractual arrangement in which a player is not bought outright, but rather has an outright transfer clause in the contract that allows the player to remain on loan. A player on loan is still a member of his former club, but can play for another team for a temporary period of time. Loan transfers are usually used by big clubs to give players who are prospects or substitutes a chance to get some game time. Mbappe’s contract with PSG is a loan transfer. Mbappe’s contract with PSG has a clause that says, “If PSG are not relegated after the one-year loan, the player will be bought for real and a transfer fee of around £166 million will be paid. PSG is a prestigious club that dominates the French league, so making it conditional on not being relegated is effectively saying, “We’ll pay you a ransom in a year.” By delaying the payment of the transfer fee by one year, PSG got around the FFP rule, which calculates revenue on a one-year basis.
The FFP rule has faced a lot of criticism, even though it’s still necessary. However, UEFA has been steadily revising the rules since 2015, and European clubs have begun to adjust their spending accordingly, and the effects are slowly becoming apparent. It’s still a much-needed regulation for European soccer, and UEFA should continue to listen to the criticisms of the soccer community in order to create a more complete set of FFP rules.