City v UEFA: The Battle Over FFP – Part I

Part 2 | Part 3

Back in May 2014, to a general sense of shock among City fans but great glee from others, UEFA announced that Manchester City had accepted a set of sanctions for failing their Financial Fair Play rules. Those sanctions included a fine, a transfer cap and a restriction on the size of our CL squad.

But why exactly did we fail FFP in the first place and why did we accept the sanctions? No one has ever really come out and said anything specific but from the little the club has said and my own research, I’ve pieced together what I believe is the real reason we failed and it’s quite a shocking story.

This is the first in a series of three articles that looks at Financial Fair Play and describes:

What it is;
How we came to fail it and suffer sanctions;
The reasons I believe we accepted the sanctions instead of taking on UEFA;
The impact of those sanctions and how we achieved compliance;
How FFP has evolved and what it means for us in the future.

FFP: Part 1 – The Background to Failure

To set the scene, let’s quickly recap what FFP is and how it’s applied. First of all, UEFA’s rules only apply to clubs taking part in the Champions or Europa League. The Premier League and Football League have their own, different rules. What happens is that a club takes its bottom line profit or loss, adds some allowed expenditure back (primarily expenditure on youth development and depreciation of infrastructure) and the resultant profit or loss represents the FFP ‘break-even’ figure for the year. That might be a deficit (loss) or surplus (profit). Based on that UEFA will then grant a licence to the club to play in the CL or EL, after applying any sanctions it deems appropriate. In extreme circumstances, it may refuse to grant a licence at all.

FFP works on a rolling 3-year basis, which requires the previous three years’ figures to be accumulated to calculate the break-even figure, but for the first assessment period it was only two years. The first assessment period was the 2013/14 season but as the full audited accounts generally aren’t available until a few months after the financial year-end, sanctions can’t be applied until nearly the end of the assessment period. That’s why sanctions weren’t announced until April 2014.

The rules require a club to report an aggregate deficit of no more than €5m for the period under review but also allowed an owner to fund a higher loss up to €45m initially, meaning they can put in an additional €40m. After the first two years, the maximum allowable loss drops to €30m for the next three assessment periods.

City’s bottom line losses for the first two financial years assessed were £98.7m and £51.6m and the indications were that they would be claiming £15m allowable expenses for 2012 and £20m for 2013. That’s a total of £35m to be added back to the aggregate loss of just over £150m, giving an aggregate break-even deficit for FFP of £115m, which is clearly way over the €45m (approx. £37.5m) allowed by UEFA. The club were talking to UEFA and all the noises were that they were happy they would be OK. So why were they seemingly so confident in the face of such huge losses, which were way above the maximum permitted under FFP?

The answer could be found towards the end of the FFP regulation book, in Annex 11. That may sound like a secret part of CIA or KGB headquarters but it was potentially our get-out for avoiding sanctions. Annex 11 was introduced as a transitional measure at the request of the clubs and it relates to an additional allowance that can be made, in certain circumstances, for players’ wages. The reason behind its introduction was that clubs had entered into contracts with players before FFP was introduced or even discussed and there was a concern that these contracts could affect the clubs’ ability to meet FFP. So UEFA agreed a temporary compromise that allowed wages paid in the 2012 financial year only, under any contract signed prior to June 2010, to be taken into account if a club met certain conditions.

The first and key requirement was that the club had to have failed the initial FFP test before it could even think about applying Annex 11. It couldn’t be used to increase a break-even surplus or reduce a deficit that was already less than the maximum allowable. If the deficit was greater than the limit though, then the calculation could be done and, to be able to use Annex 11, there were three conditions that had to be satisfied:

1. The loss in financial year 2012 had to be solely due to this wage figure; 2. The aggregate loss over the whole assessment period had to be as a result of the 2012 losses only;

3. The trend of results had to be improving over the years being assessed, so that the club could demonstrate it was on course to comply with FFP.

If all of these conditions were met, and the agreed Annex 11 wage figure was the difference between passing and failing, then UEFA would, in principle, not apply any sanctions. The indications were that City’s allowable wages under Annex 11 would be approximately £80m and, when you deduct that from our aggregate loss of £115m, it gives a figure of £35m, which is just within the maximum allowable break-even deficit. That meant that if we’d done our sums right we should, in principle, avoid any sanctions.

At this point, it’s important to understand that condition 1 relied solely on the 2012 accounts whereas conditions 2 and 3 needed the 2013 accounts. The calculation for condition 1, as set out in the UEFA toolkit, was a bit wordy but was illustrated by worked examples, and indicated that City’s 2012 loss was solely as a consequence of the applicable wages paid and therefore we met that first condition. That meant that if we reported the right results in 2013, we could avoid sanctions, even though we’d failed FFP.

I calculated that we needed to report a net loss (before allowable FFP expenses were added back) of less than £55m in the 2013 financial year to meet the other two conditions and avoid sanctions. And we did report a loss (which I mentioned above as being £51.6m) within the required figure. So everything looked OK, even though we’d reported a break-even deficit well above the maximum allowed. The indications were that we could plead mitigation under Annex 11 and avoid sanctions. But that assumption proved false and for a rather surprising reason.

The announcement of a range of sanctions in May 2014 therefore came as a bit of a bolt from the blue, as the club had seemed confident it would avoid these and my calculations seemed to suggest that this confidence had some substance. The sanctions imposed were as follows:

A maximum break-even deficit (i.e. after allowable expenses were added back) of €20m in financial year 2014 and €10m in 2015;
Revenues from the sale of group assets within the group would be excluded from future calculations;
Wages would not be increased over the next two years;
A limit of 21 players (instead of the maximum 25) on the UEFA A-List for the period of the settlement;
A limit on transfer spending (reported to be £49m net of any player sales);
A fine of €60m, €40m of which would be refunded if we complied with the sanctions.
We also agreed not to increase two of our Abu Dhabi-based commercial arrangements and not to include revenues from within the group in future break-even calculations.

… Continue to Part 2