Manchester City and the Future of Financial Fair Play

The biggest focus in the world of soccer continues to be on the return of major leagues around the world, as well as looking forward to the completion of the Champions League and Europa League in August. However, one story did steal some of that attention in July – Manchester City having its two-year ban from UEFA competitions for violating Financial Fair Play overturned. While there was a lot of back and forth in the aftermath, there’s been very little focus on what the actual circumstances of the case were, and why exactly Man City was able to escape significant punishment.

What is Financial Fair Play and What is the Goal?

Financial Fair Play is a set of rules first instituted in 2012, limiting the amount of football expenses a team can have in relation to their football revenue. Originally, the focus of the rules was aimed at analyzing a club’s debt and ensuring that they were meeting debt payments and obligations – any case where this wasn’t happening risked a penalty. The rules have been expanded to add breakeven thresholds – a team can only exceed revenues by a set number, with a higher threshold if they’re able to offset those losses directly through cash from ownership. UEFA provides an overall summary here. Punishments can include warnings, transfer bans, fines, withholding of UEFA prize money, and bans from UEFA competitions.

In the analysis for if teams are meeting these requirements, it’s important to understand which revenue and expenses are included. As examples, expenses related to infrastructure, training facilities, and youth training are not included in the calculations. Similarly, sponsorships provided by parties that are owned by the same ownership must be provided at a fair market value. This results in money spent on transfers, employee pay and benefits, and debt/finance costs being compared to income from transfers, matchday revenue, TV revenue, sponsorship/advertising, and prize money.

The implementation of FFP was driven by the large amounts of debt being entered into by European club teams, causing an increasing number to be in danger of insolvency and going into bankruptcy. A 2009 review by UEFA determined that over half of European clubs had suffered losses in the prior year, and at least 20 percent of those were believed to be in financial danger. Michael Plattini stated that “Fifty per cent of clubs are losing money and this is an increasing trend. We needed to stop this downward spiral. They have spent more than they have earned in the past and haven't paid their debts. We don't want to kill or hurt the clubs; on the contrary, we want to help them in the market.”

Based on that financial situation, FFP was ultimately driven by the owners of clubs throughout the continent – they pushed for regulations in order to prevent an arms race that drove those without the financial strength to continue spending beyond their means. The goal was to force clubs to build for the future instead of looking for quick fixes. How much either of those goals is met by the current structure of FFP is up for debate, but the goals as stated by UEFA remains the same in the current day.

Previous Cases and Penalties

While UEFA stated that the most recent Manchester City case was the most egregious violation of Financial Fair Play to date, it’s certainly not the first. A sampling of some of the clubs that have been penalized previously:

  • AC Milan – Violations of breakeven provisions – Ban from UEFA competition

  • PSG – Violations of breakeven provisions – Settlement, including fine and squad restrictions

  • Sporting – Not making debt payments on time – Fine

  • Fenerbahce – Violations of breakeven provisions – Settlement, fines and other restrictions. Violated the settlement and reached an additional settlement to avoid a European ban.

  • Galatasaray – Violations of breakeven provisions – Ban from UEFA competitions, settlement after later violations

  • Malaga – Late payments on debt and money owed to other clubs – Ban from UEFA competition

  • Manchester City – Violations of breakeven clause and questions about sponsorship value – Settlement, including fine and squad restrictions, as well as further breakeven requirements.

Man City Case

To understand the current Manchester City case, it’s important to start with background of their prior settlement. The majority of Man City was purchased in 2008 by the Abu Dhabi United Group (ADUG) and Sheikh Mansour bin Zayed Al Nahyan. They immediately set out to change the fortunes of the club with large investments and transfer purchases. The strategy paid off – Man City went from mid-table finishes to being champions by 2012.

Notable Early Transfer Fees (from TransferMarkt)

In 2014, Manchester City reached a settlement with UEFA regarding Financial Fair Play violations. City was determined to have not reached a breakeven, though they continued to claim that they had acted in accordance with FFP despite accepting the sanctions. Based on limited public information, the issues raised and disagreements between UEFA and Man City appear to be:

· Whether salaries for players acquired before 2010 should be counted in the breakeven calculations

· Whether Manchester City had provided adequate financial disclosures

· Concerns about the sponsorship agreement with Etihad Airways

In line with this, UEFA also issued a warning to all teams in 2013 about ensuring that sponsorships from related parties were done at fair market value. Manchester City was also required to comply with financial monitoring from UEFA before they would be cleared; they were determined to have done so. Despite that, almost all of the same issues would return in the current case.

In late 2018, Der Spiegel published a four-part series of articles focused on Manchester City’s business practices. The articles were based on hacked emails from within the organization (Manchester City has never confirmed the authenticity) that showed agreements for money to be funneled from the ownership through Etihad Airways and Emirates Telecommunications (Etisalat) in the form of sponsorship money. This would allow Manchester City to achieve FFP compliance, since sponsorship money is entirely allowed but there is a limit on ownership investment to offset losses.

Based on these articles, UEFA opened a new investigation into Manchester City in 2019. That investigation was referred to UEFA’s Adjudicatory Chamber in May 2019; however, there were also troubling leaks at that time about what the final decision and punishment would be. Partially based on those leaks, Manchester City filed an appeal to the Court of Arbitration for Sport (CAS) in 2019. While CAS noted at the time that the leaks were troubling, they ruled that the appeal was not applicable at the time because the final decision by UEFA had not yet been issued.

In February of 2020, UEFA announced its decision – they had determined that Manchester City had “committed serious breaches” of Financial Fair Play, would be fined, and would also be banned from UEFA competitions for two seasons. These allegations focused on a conclusion that Manchester City had disguised significant ownership contributions as sponsorship fees. They also alleged that the club had failed to cooperate with their investigation. These punishments could have cost Man City as much $190M. City quickly appealed to CAS again, and the case was heard earlier this year.

Prior to the start of the proceedings, UEFA made several requests for evidence. These included original versions of the hacked emails, the full email chains belonging to those, payment ledgers, and the identify of individuals involved in the emails. Manchester City complied with all except for the full email chains, which UEFA then dropped the request for – that would end up being a point in CAS’ decision.

Once the proceedings started, Man City’s case can be summarized as:

  • The allegations that ADUG had entered into a scheme to make payments through Etisalat and Etihad were false and have no basis in the evidence

  • The conclusions drawn by UEFA require inferences from the emails that are not backed by any additional evidence

  • Evidence clearly shows that Etisalat and Etihad made the payments on their own

  • While a payment was made by ADUG that represented Etisalat’s sponsorship fees, this was appropriate accounting and Etisalat later paid it back

  • Etihad’s accounts have been audited and do not show evidence of the scheme

  • The fees paid by Etihad and Etisalat matched fair market value for the time

  • The alleged breaches are outside the statute of limitations since they are beyond a five-year period that would end with the announcement of sanctions on February 14, 2020

  • Manchester City did comply with evidence requests from the UEFA investigation

  • UEFA violated due process in its investigation by not notifying Man City that the investigation was done and through the leaks to the media

  • The punishment did not fit the alleged breaches

In response, UEFA argued:

  • The five-year period for statute of limitations would end with the beginning of the investigation in March of 2019

  • Etisalat payments for 2012 and 2013 were provided by ADUG, and could not have properly been counted as sponsorship revenue without a signed contract in place

  • The leaked emails show that only 8M of Etihad’s 68M sponsorship was really provided by Etihad

  • Manchester City refused to answer answers or provide documents during the investigation, and answers that were given are false in UEFA’s opinion

  • Because of the other findings, Man City had provided false financial documents to UEFA during their monitoring period from the earlier settlement

This month CAS provided its ruling – Manchester City’s UEFA competition would be overturned, and they would pay only a fine of 10M. The key questions in the opinion of CAS and the reasoning behind their decisions are below.

1.) Authenticity of the Leaked Emails

Manchester City continues to refuse to confirm or deny the authenticity of the emails. However, the original emails and testimony offered show that while there were changes made, there is not a realistic question about the authenticity of the emails. CAS also determined that those emails were admissible since UEFA themselves had not obtained them illegally.

2.) Did UEFA violate due process?

UEFA has specific regulations related to sponsorship money coming from related parties and ensuring these are done at fair market value. However, they never made a final decision in this case about if there were related parties – Man City argued that as being a violation of due process.

CAS believed that there would be a potential case for the violation of this, since fair market value could be determined by how much that specific sponsor would be willing to pay. However, since UEFA did not actually charge with violations of the related party requirements, CAS determined that not finishing that investigation was not a due process issue.

The leaks during the investigation and published in the media clearly had to have come from someone within UEFA, and that is a major concern. However, since the leaked punishments matched the final decision, the decision was already made and there’s no evidence that the leaks represented an influence on the decision.

3.) When does the limitation period start?

UEFA’s rules state that the statute of limitations is five years from the “start of the prosecution”. While CAS criticized the lack of clarity in that rule, they also said that neither party’s stance made sense – instead, the period should start with when UEFA announced charges were filed. Based on that, the statute of limitations would start in May 2014, and any violations from earlier than that are time-barred. This meant that the Etisalat payments from 2012 and 2013 could not be considered in this investigation.

4.) Did Manchester City disguise ownership contributions as sponsorship income?

It’s important to note here that even accepting the emails as evidence showed only the intent to breach regulations, but that UEFA would have to prove that the groups actually followed through on the scheme. The CAS panel determined that there was not enough evidence provided that 59.5M of Etihad’s sponsorship was provided by ADUG, and that such a conclusion would require belief in a conspiracy among leadership in large companies that there was not evidence to support. Witnesses stated this never actually occurred and audited financial records did not show evidence of this either.

CAS did find that Manchester City provided inaccurate testimony regarding the payment that ADUG made on behalf of Etisalat. However, those payments occurred outside of the statute of limitations, and therefore could not be considered in this decision.

5.) Did Man City comply with the investigation?

This was the one area where CAS found in UEFA’s favor, though it also raised issues with UEFA’s processes. CAS determined that Man City continuously refused to provide documents, and that it continued to do so by not complying with providing the email chains requested during the CAS proceedings. However, UEFA then dropped that request in order to ensure the process moved quicker – that meant that CAS could not punish Man City for refusing to provide those email chains.

Based on all of this, CAS determined that it could only find Manchester City guilty of obstructing the investigation. This alone was a serious violation, as Financial Fair Play cannot function without cooperation by the member clubs. However, UEFA’s penalties did not clarify which portion was related to the sponsorship income and which was for refusing to cooperate. CAS therefore landed on the 10M fine.

What Does This Mean for FFP, and Does it Make Sense to Begin With?

This case is clearly a huge decision against FFP, and many have argued that it represents free reign for all teams. That is overstating the decision – CAS’ decision shows that they would have upheld the ban with sufficient evidence. However, that leaves two huge questions. The first is rhetorical - since FFP requires cooperation from teams, how many would forfeit a 10M fine in order to avoid providing evidence? The second is potentially more vital for FFP going forward, especially combined with questions about how investigations into PSG for similar violations were conducted – do limitations on ownership contributions make sense in the first place?

UEFA’s stated goals for FFP are to ensure fair competition and avoid the debt issues that plagued the sport – while the current regulations may help in the second area, it would be hard to argue that enforcement of them would really do anything to provide a level playing field. Instead, preventing owners from investing their own money just guarantees that the largest, most visible clubs are the ones that are able to compete at the highest level.

We can take Everton as an example. They are a historic club playing in the highest-level of English football; despite that, their kit deal is a small fraction of some of the others in the league. If they aren’t able to obtain that type of sponsorship, can they really be expected to compete at the highest level without contributions from their wealthy ownership? UEFA argues that this just promotes those smaller teams focusing on long-term growth, but that doesn’t fit the reality of modern football – focusing on growth and building from within is important, but will only result in the richer clubs buying your players if you aren’t able to increase your own spending.

Reported Premier League Kit Deals (£M)

Some type of FFP regulation is clearly needed, clubs cannot afford to go back to the reckless spending that drove the debt crisis within soccer to begin with. However, I would argue that an adjustment is needed to the ability for owners to provide their own contributions – Man City and PSG’s owners are not in danger of bankruptcy, and would have no motivation to circumvent the rules if they could provide their own cash to fund the clubs.

There is already the ability for ownership groups to provide funding to cover losses, but that amount is limited. My proposal would be to adjust how that limit is done. Instead of having a limit on how much can be provided, I would instead institute new regulations:

  • The owner must provide cash contributions that are greater than the shortfall. The amount of that would be important to get right, though my initial thought is that it would need to be twice as much to guarantee a similar shortfall could be covered in the following year. Over time, that requirement could fluctuate based on how much excess cash has already been provided previously.

  • The shortfalls and any contributions cannot result in excess debt within the club, or an inability to meet those debt payments

  • The ownership must also provide proof that it is not causing excess debt for the owner that would put the club in danger in the future

Yes, these regulations would allow clubs with rich owners to buy players and have greater success; however, it’s naïve to think that isn’t already taking place. The real question is how many teams will be provided an avenue to compete – without contributions from ownership, it’s a very small group. Some will also argue that this will drive a new arms race and smaller clubs going into debt – that’s clearly a risk, but at some point ownership groups have to be responsible for their own conduct.

It is unlikely that a structure like this would actually be adopted, especially given the public perception it would cause. However, the Man City case shows that the current structure is clearly not working. UEFA must act soon to make adjustments to FFP if it wants any chance of it being successful moving forward.

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