City v UEFA: The Battle Over FFP – Part II

Part I | Part 3

This is the second part of a three part series describing the background to FFP, why I believe City failed, the impact of that failure and the future chances of compliance. In the first, I described what FFP was and why City felt they’d be able to use the provisions contained in Annex XI to escape sanctions. In this one, I show how I believe UEFA pulled a fast one on those provisions, which ensured City were sanctioned when they’d previously been confident of avoiding this, and assess the impact (or lack of it) that the sanctions had.

FFP: Part 2 – UEFA’s Flip-Flop & Sanctions

The general assumption at the time was that City failed because UEFA had taken exception to the Etihad sponsorship and reduced it. For reasons I won’t go into here but will explain in the final part, this was never likely to be an issue. PSG’s sponsorship with Qatar was reduced by UEFA so, and had they done the same to City, it would have been mentioned in their sanctions statement. The fact that it wasn’t meant that there was no issue with the Etihad sponsorship but that didn’t stop erroneous comment.

The club statement did however give a clue as to what had gone wrong. It talked about a difference of opinion in applying the wages figure calculated under the Annex 11 provisions. This was a bit of a surprise to me as it all seemed straightforward so I thumbed through the rules and the supporting documentation, where I discovered some UEFA chicanery that really didn’t get the exposure it should have done.

To aid the clubs in their FFP reporting, UEFA had issued what it called a “toolkit” in 2011, comprising a spreadsheet template in which to submit the relevant figures and a series of instructions on how to fill that in. There was a very detailed section of how to calculate allowable wages under Annex 11 and how to carry out the tests required to see if this figure could be used in mitigation. According to that, City met the first condition, as I explained in the first part of this series.

But UEFA had pulled a fast one. After City’s 2012 accounts had been published and filed (in February 2013) they issued an updated version of their toolkit in April 2013, which had one major change as far as Annex 11 was concerned. This changed the test for determining whether the loss in 2012 was purely attributable to the calculated wage figure. Applying it using the same figures they’d already used meant that City now failed it and there was nothing they could do, as the figures for the 2013 financial year had been finalised and published.

So virtually whatever City did now, other than report a significant profit in 2013, was irrelevant as they couldn’t now use the £80m wages to avoid sanctions, having believed they could when they applied the test in place when the account were filed. Once this became clear, the club were reportedly furious. Having worked closely with UEFA to ensure that they had understood the rules correctly and were working towards meeting them, there must have been a feeling that UEFA had done them up like a kipper. In UEFA’s defence, the amended rule makes more sense than the original one but that really wasn’t the point. City had applied a test and met it but then found the goalposts had been moved, so that they now didn’t meet it when applying the revised test.

Consider this analogy – you drive down a road with a 40mph speed limit but well within that limit. Then the next day the signage changes and limit is reduced to 30mph, so you drive accordingly. But to your amazement, you receive a speeding fine for driving at 37mph while it was a 40 limit. When you query this, the council inform you that they’d changed the limit the week before but hadn’t got round to changing the signs. Your response would most likely be “I’ll see you in court”. I’m sure the club considered that course of action but they agreed the sanctions and took it on the chin.

There are probably a couple of reasons for that. One is likely to be that they didn’t think that a legal battle with UEFA, certainly not one fought in public, was in their best interest PR-wise and possibly one they might not win. It certainly wouldn’t win them any friends among the clubs who’d passed FFP.

The other reason was that there might actually be a silver lining in those sanctions and I’ll explain why.

Just to remind you, the sanctions were;

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 the sanctions were complied with.
City also agreed not to increase two Abu Dhabi-based commercial arrangements and not to include revenues from within the group in future break-even calculations.

The first sanction seemingly restricted City to lower than the normal deficit allowed to clubs under FFP. As I explained in Part 1, normally the requirement was an aggregate break-even deficit of up to €45m over three years but UEFA was now insisting on City reporting a maximum break-even deficit of €20m in financial year 2014 and €10m in 2015, setting aside the standard requirement to report a break-even figure over three years. This worked very much in their favour, as I’ll explain in the final part of this series, and was possibly the key reason for accepting.

The second related to the sale of club assets to two new companies within the City Football Group structure. These were City Football Services and City Football Marketing and they were set up to provide centralised services to all clubs within CFG, including New York City FC and Melbourne City. These services included marketing and player recruitment, with the new companies taking on the staff and things like the comprehensive player databases. The idea is they will charge the individual clubs for their marketing or technical services. There was nothing intrinsically wrong in selling the intellectual capital (which is a fancy term for skills, knowledge and data) to the new companies – plenty of organisations work that way – but it looked a bit dodgy against the background of FFP, as it was designed to increase City’s revenue by using income from within the group. It’s unlikely to be repeated so the sanction wasn’t really of any concern.

The one on wages was largely irrelevant as 2013’s wages almost certainly included huge pay-offs to Mancini and his entourage. These were unlikely to be repeated any time soon so the wage bill wouldn’t be anywhere near as high for the next few years, plus the deals referred to above, moving staff off City’s books and onto those of the two new companies, had taken about £12m off the wage bill as well (although this was re-charged to City and the other clubs as a general expense). So this was also effectively an irrelevant sanction.

A 21-player limit for the CL squad was more of a concern but City only used 21 players the season before, albeit there were 23 in the squad. Also they didn’t really have many home-grown, club-trained players in the squad so it’s unlikely they could have registered more than 21 anyway, as at least 4 of the 25-man squad have to be club-trained. The transfer spend limit was a concern but the club were insistent that was within their plans anyway (although I’m not sure I really believe that) and it was net rather than gross spend that was restricted. So that was probably an inconvenience.

The fine did hit City in the pocket but they were presumably confident it would be limited to €20m/£16m and it was an allowable expense in the break-even calculation, so it wouldn’t affect their ability to comply with the limited losses allowed in the two next periods.

In the final part, I’ll talk about what I think was the clinching reason City decided to accept the sanctions rather than challenge them, how they’re placed to meet FFP going forward and the key changes made to the rules since those sanctions.