Sample Research Paper on Financial Fair Play

Financial Fair Play

Competitive Imbalance

The new UEFA financial fair play (FFP) does not improve competitive balance in the sports industry. Instead, the FFP increases the imbalance between teams in all areas across Europe. One of the reasons for competitive imbalance is the effect of the breakeven rule(Desbordes, 2014). In the rules, the FFP does not give small clubs an opportunity to overspend and increase their chances of climbing to the top clubs in the league(Desbordes, 2014). The new UEAF FFP rules favor the big and wealthy clubs that have the ability to overspend on purchasing talented players(Desbordes, 2014; Storm, 2012). The breakeven point is pegged at €45m, which many small clubs cannot afford(Desbordes, 2014). The other checks and balances besides breakeven points also do not favor the small clubs. For instance, the rules require the owner of the club to inject financial equity depending on the amount of loss(Boyle, 2012). The small clubs lack strong financial strength whereby the owner can inject equity to cover the club’s loss. Since small clubs cannot meet the minimum threshold set by UEFA FFP, they cannot participate in the champion and top-level leagues. Thus, there is no competitive balance in the league in relation to the current UEFA FFP rules.

The only possible solution to the small clubs achieving the minimum qualifications outlined by UEFA is finding a wealthy sponsor(Christian, Lammert&Gregor, 2012). This is because the sponsor will help the club to overspend and purchase outstanding talented players that will help the club to rise to football glory. However, Christian, Lammert, and Gregor(2012) state sometimes this happens for a single season and the club fallback to the lower league. For instance, in the English Premier League, some clubs in the bottom division league are promoted to top tier division, but they are relegated at the end of the season (Christian, Lammert&Gregor, 2012). This is because of the inability to maintain and withstand stiff competition in the top tier level.

The other factor resulting in uneven competition is the poaching of players between clubs. Since the FFP allows the big clubs to overspend, they will continue suppressing the small teams(Christian, Lammert&Gregor, 2012). In this case, the big clubs have the financial strength and they are able to purchase talented players from small clubs by offering high allowances to the club and player(Christian, Lammert&Gregor, 2012). In this context, the small clubs will continue to suffer because they do not benefit from the talented players that they develop. Thus, small clubs have become sports nurseries for big clubs whereby they develop new talents and sell to big clubs. Since the new UEFA FFP rules do not address this challenge, there is no balance in competition in the sports industry. Therefore, in the long term, the big clubs in the top tier of the league will continue to dominate football as long as they are willing to overspend.

According to Storm(2012), the new UEFA FFP rules display unprofessionalism in the sports industry from an economic point of view. This is because the rules do not encourage fair play, but rather encourage uneven competition amongst football clubs. This may be explained as a market failure in the sports industry. The breakeven point and revenue rules are a barrier to entry of new clubs to participate in the champion league(Storm, 2012). A fair market has a perfect competition where there is equal participation of each club in the champion league. The FFP rules develop an oligopoly market, which will be dominated by a few big clubs across the European region (Storm, 2012). Thus, FFP rules are unnecessary since they cause uneven competition in the football sector.

Player Salaries

The new UEFA FFP rules do not have strong influences on player salaries especially for the big clubs across the European region. This is because the big clubs continue to overspend in searching for new talents and offering high allowances to the players. There have been developments of new strategies by the clubs, which allow the club to continue overspending and avoid violating the FFP rules.

One of the strategies used by big clubs is freeing financial revenues by selling some of the players and retiring players(Llndholm, 2011). The new UEFA FFP rules allow clubs with wage bills above £52m an expansion of wage by £4m every season for the next three seasons(Llndholm, 2011). Although this would have helped in curbing the increasing wage bill of many top-tier clubs, current researches indicate that there is no impact of the regulation(Llndholm, 2011). This is because though the club does not violate the FFP restrictions, they generate more revenue to increase the players’ salaries through other channels. It is important to understand that salary and allowances are the key motivators to employee performance(Llndholm, 2011). Therefore, there are different rewards offered to players performing exemplary in the field. For instance, in Manchester United club, in England, the intention of selling Vidic at the end of this season is a plan to raise the revenue for the new contract signed by Rooney. Since Vidic wage is higher than Rooney’s, the extra revenue raised will help in paying the increase in wage for Rooney in the new contract(Boyle, 2012). Moreover, the retirement of RianGiggs at the end of the season provide Manchester United with an opportunity to purchase more players(Boyle, 2012). In this context, the new FFP restrictions do not affect or prevent clubs from overspending and increasing the allowances offered to players.

The other reason for the FFP regulations was curbing the increasing debts that clubs owe to various investors, shareholders, and creditors(Preuss, et al, 2014). Preuss, et al (2014) states that the debts have been increasing consistently over the years as clubs increase their assets. One of the key assets for football clubs is players(Preuss, et al, 2014). The consistent increase in the allowances paid by clubs to players is highlighted as one of the causes of the increase in club debts. Some clubs continue to overspend by purchasing high-value players and they are unable to pay the player allowances and salary using the revenue collected from club promotions(Preuss, et al, 2014). Thus, the club seeks alternative sources of financing such as credit to pay players’ debts and cause more debts to the club. Madden (2012) depicts that some clubs have become insolvent thereby losing their assets due to debts. In this respect, UEFA thought that restricting the increase in allowances and salaries paid to players could help spiral debts across European region clubs. However, the new strategy adopted by clubs to increase players’ salaries will not help in realizing the goals of UEFA FFP rules.

Club Revenues

According to Madden (2012), the historical success of a club in any league has a strong impact in the future success of the clubs through winning the league and increasing the revenue collected from promotions. When a club is successful, it attracts more spectators and fans both locally and internationally thereby increasing the amount of revenue collected by the club(Madden, 2012). This increases the chances of the club overspending by buying talented players from other big and small clubs. Therefore, this increases the chances of the club remaining at the top of the league at the end of every season.

According to Madden (2012), the players are the main generators of the club revenue. In this context, the performance of the players affects the club performance and club revenue generated from club promotion activities and charges. When the club is outstanding in performance and has excellent players, it is likely to have many spectators attending their matches and fans across the globe(Madden, 2012). Therefore, the club can raise more revenue as compared to poor-performing clubs with few spectators and fans. This may explain the development of an oligopoly market in the sports industry. Few clubs dominate the different football leagues across Europe and other regions in the world.

Successful clubs can command the behavior of the fans and coarse the fans to pay exorbitant charges and prices for the club promotion products (Sass, 2012). These clubs have loyal fans that are willing to support the club even when it loses dismally(Sass, 2012). Although there is no improvement in the quality and quantity of the club tickets and products, the fans are willing to pay high prices to identify with the club(Sass, 2012). This way, the successful clubs continue to raise more revenue by overcharging the fans. The number of fans to a club influences the value of the club brand in the market(Sass, 2012). The club with a high number of fans is highly valued regardless of the total value of the club’s assets. This psychological effect develops in the fans’ and investors’ minds. Therefore, investors are willing to invest in the club activities since they will reap from the club’s loyal customers (fans).

One of the main concerns for UEFA to develop the FFP regulations was the fast increase in wage bill as compared to the increase in the revenue(Whittingdale, 2011). Although there is an increase in the revenues collected by clubs, the increase in the wage bill was higher than the revenues generated(Whittingdale, 2011). This is because of the desire for clubs to purchase new and outstanding talents to win their respective leagues. While there is justification for improving the club’s performance in the league, the strategy used is not economical. The FFP regulations are aimed at ensuring the clubs spend the amount of money they can raise. However, the loopholes make the FFP rules impractical in the football sector.

Player Transfers

The new UEFA FFP regulations have an influence to the transfer of players in the European football sector. The football clubs are using the same strategy used in increasing salaries and allowances for players to enable transfers especially for high-value players from competitor clubs. The clubs sacrifice some of the players to purchase a high valued player(Drut&Raballand, 2012). In this case, the clubs escape violating the FFP regulations and acquire the dream players. However, this has a negative effect to small clubs in the European region. Since small clubs cannot raise the amount of money required to purchase outstanding players, they will remain suppressed in the league. Therefore, the FFP regulations do not encourage fair play in the player’s transfer.

Some big clubs are violating the FFP regulations when searching and transferring players(Storm, 2012). The clubs are taking advantage of the financial strength and outstanding performance of the club to buy players against the FFP regulations. For instance, in the 2010/2011 English Premier League season transfer window, Chelsea FC acquired Fernando Torres and David Luiz at a cost of £50m and £25m respectively despite announcing a loss of £67.7m(Desbordes, 2014). In relation to FFP regulations, there is no justification for Chelsea FC to spend £75m on player transfer and the club is incurring losses. However, since Chelsea FC is one of the big clubs and can pay the penalty imposed by UEFA, it will continue to search for high-value talent. This is an indication of the club’s violations of FFP rules to achieve its targets. When considering this case, the FFP rules restrain the small clubs from overspending. This is because the regulations may not have significant effects to the big clubs in the European region.

However, the FFP may help in reducing the transfer costs for the clubs. This is because the regulations limit the inflation created by clubs during the transfer of outstanding players. The transfer cost is a factor of the contract of the player(Drut&Raballand, 2012). The FFP introduced the amortization of transfer contracts, which will help in reducing the total transfer costs(Drut&Raballand, 2012). For instance, when amortization is applied in the transfer of Fernando Torres for a 5-year contract, the transfer value may be approximately £40m, which is less than the initial transfer cost of £50m. In this context, Chelsea FC would save £10m in transfer costs(Desbordes, 2014). Therefore, when considering these issues, the FFP regulations do not promote fair play in the football sector. The rules favor big clubs and restrict small clubs from participating in the champions’ league. The big clubs will continue to dominate the champions’ league since they can meet the minimum qualifications stated by UEFA FFP rules.


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