With January around the corner Financial Fair Play (FFP) is being mentioned a lot again but not all of us fully understand what it means.
Fortunately, FYP asked our resident sports lawyer, Andy Street, to explain it to us.
So, FFP then?
Is that a question? I do hope you didn’t treat Mr Speroni to questions like this when you interviewed him.
We didn’t but he has better biscuits than you. We’ll have another go. What is FFP?
FFP exists in various forms in various different competitions, but the general aim in all of its forms (whether under UEFA’s regulations governing Champions League clubs or the Premier League’s Rules) is to prevent the type of unsustainable spending that, in the late 90s and early 2000s, forced a number of clubs into severe financial trouble.
So it’s to help anyone avoid ‘doing a Portsmouth’ basically?
Pompey were one of many football related insolvencies and were far from alone in overspending, although they suffered its effects more acutely than most others. You’d have to say, looking at the number of football clubs which entered into administration prior to the regulations being implemented by the English Football League (EFL) and at Premier League level, compared with the numberof clubs in administration since the rules were introduced, that it could be said to have worked.
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Ok so that explains why we have it. What is it though?
Well, first off, it’s worth noting that in England there are two different regimes of FFP rules. One set is under the EFL’s Regulations, which applies to clubs in the Championship, League One, and League Two, and which are not relevant to Palace….yet!
Oi! Enough of that! But keep going…
Those Regulations broadly state that clubs can make a loss of up to £13m per season. Since they don’t apply to Palace at the moment, they aren’t so relevant for the purposes of what our fans will be interested in, but it does show that there are multiple forms of FFP regulations, rather than a universal set that applies to every club in the same way.
Enough of the Championship, what about the Premier League?
The Premier League has two forms of ‘FFP’ type regulations. The first are the Profitability and Sustainability Rules. These are analogous to the EFL’s FFP Regulations, in that they try to limit the amount of financial losses clubs can incur over a specified period. At present, clubs are not allowed to make a loss of more than £105m over a three-year period.
Yeah, but so what? You can just get one of the chairmen to sponsor the training ground for a billion quid and the problem goes away.
Nope, that type of cunning ruse is now not possible, as the Premier League will look at the market value of transactions. If they think someone is pulling a swift one with a dodgy naming rights deal, or something of that ilk, they’ll tell the club to change their calculations so that they reflect the reality of what those naming rights would actually have been worth if an independent company were to sponsor the training ground.
Interesting. So I assume that Palace must be making huge losses for us to be bothered about all of this?
Crystal Palace have in recent seasons generally either turned a profit or made a very small loss. The Profitability and Sustainability Rules (PSR) therefore are not likely to have much of an effect for a club like Palace at present.
Wait just a minute. Steve Parish said that FFP is a big issue! He must be lying to us!
Remember I said there were two different strands of FFP in the Premier League? It’s the second strand that has the real bite for some clubs: Short Term Cost Control (STCC). STCC was implemented due to the arms race on player salaries, which is the biggest single risk factor for the financial stability of clubs. STCC attempts to remedy that.
FFP for wages then?
Precisely. STCC basically requires clubs whose wage bills are over certain thresholds (and most clubs are over the threshold) to stick to a set maximum amount of increase in their wage bill for each season. The permitted increase is £7m per year until 2019, when the Rules will probably be renewed.
Hang on. Lots of players earn 100 grand a week these days. £7m doesn’t sound like very much in this day and age!
It’s not. And it’s why certain clubs have become keener to move players on and get them off the wage bill after they have become less important or fallen out of favour. It’s always why some clubs have found themselves limited in transfer windows when they come up towards the wage increase limit, as Palace reportedly did in early 2016. It’s this limit that Steve Parish was probably referring to when he used the term ‘headroom’ in various interviews. There are a few caveats, though. Clubs can top up their £7m annual allowance with increases in their non-TV related revenue.
Is that why Manchester United have an official tractor brand and Palace are sponsored by a betting company nobody has ever heard of?
I couldn’t possibly comment on individual cases, but there is a clear motivation now for clubs to expand their commercial operations in order to be able to spend more on player salaries. Increasing gate receipts will also allow a club to spend more on wages. The reason Premier League centrally allocated money is excluded from consideration is to stop clubs blowing all of their TV revenue on wages upon receiving it. The other way clubs can top up the amount of permitted increase is by profits on player trading; selling on their stars, basically.
So, if I buy a player for £10m and sell him for £20m, I have an extra £10m that year to give to players in their paycheck?
Not quite. Football clubs record transfer fees in their accounts split over the course of the player’s contract. If you sign a player for £5 million on a 5-year contract, you put it in the books as a £1m cost per year, rather than a single cash payment of £5 million. If that player is sold for £5 million after 3 years at the club there would still be £2 million of his transfer fee to be written off each year as a ‘cost’ (or as accountants call it, amortisation). The profit on that player would therefore be the £5 million transfer fee received for his sale minus the £2 million of the fee remaining on the books to be written off - £3 million.
You can make a profit on a player you bought for £5m and sold for £5m?! What is this witchcraft?!
I don’t make the rules. But certainly, the way player profits are recorded in clubs’ accounts may explain why fewer clubs have breached the various FFP regulations (including the Premier League’s PSR and STCC) than fans might expect upon reading of colossal transfer fees being splashed. It’s one reason why it’s rather difficult to infer who may or may not be complying with the regulations, despite complaints from some chairmen. Nobody has been sanctioned for breaching the rules just yet, but who knows if that will ever happen. If clubs were to breach them, they could be at risk of transfer embargos or being made to stick to a League mandated budgets though.
Well now I feel a lot better informed than I was before I started asking you questions about all of this. You’re not going to charge me for this are you?
Erm, about that….