TPO IN FOOTBALL: WHAT IS "THIRD PARTY OWNERSHIP"?

 TPO IN FOOTBALL: WHAT IS "THIRD PARTY OWNERSHIP"?

About The Author Mark O'Neill (Regular Writer)

Mark is a graduate of the Open University, where he recently graduated with a First Class Honours in his BSc (Hons) Open Degree. Mark is currently working full time for the Financial Ombudsman Service as an Adjudicator, while also undertaking an LLM in Sports Law in Practice at De Montford University with the aim of working as a solicitor specialising in sports law.

"Despite the enormously significant Bosman case, there is an unfinished revolution in the football transfer market."

Nick De Marco QC

The FIFA Regulations on the Status and Transfer of Players (RSTP) regulate the employment, registration, and transfer of footballers from one club to another. One of the most controversial aspects of RSTP is what is known as Third-Party Ownership (TPO) of footballers. Most would assume it would be easy to define who or what a „third-party‟ is, but literal readings of the regulations occasionally produced absurd results which the regulators may not have intended when they implemented the TPO regulations. This has brought up interesting questions of interpretation, as well as the rationality of the regulatory environment surrounding TPO, which will be looked at in this piece.

What are the FIFA RSTP, and what do they say?

The FIFA RSTP were first introduced by FIFA, the world governing body of football, in 2001 as a response to the 1995 decision by the European Court of Justice (ECJ) in Union Royale Belge des Sociétés de Football Association ASBL v. Jean-Marc Bosman, which fundamentally changed the football transfer system. In Bosman, the ECJ held that the football transfer system in place at the time, which allowed clubs to demand a transfer fee from the player‟s next club upon the expiry of their contract, was contrary to Article 45 of the Treaty of the Functioning of the European Union, which governs freedom of movement throughout the European Union and European Economic area. The pre-Bosman situation denied football players their right to move freely within that area for work in their field.

EU law allows for rules or practices which are contrary to EU law to remain in place if they are a reasonable and proportionate response to achieving a legitimate aim. The court rejected the arguments that the transfer system in place at the time allowed clubs to maintain a competitive financial balance, and also allowed for the training and development of young players, as the transfer fees involved more often than not did not accurately represent the cost of training the players. As an aside, Bosman also stated that nationality quotas in match day squads were contrary to EU law. As a result, these were abolished and replaced with the present 'homegrown player rule‟.

In consultation with the European Commission, a new set of principles for the international transfer of players emerged to encourage freer movement for players, allow for a certain amount of contractual stability for clubs through designated transfer windows, and create a solidarity mechanism to allow clubs involved in a player‟s development to financially benefit and to promote arbitration mechanisms instead of the courts in dispute resolution. These foundations have been built upon to produce the transfer system in football we see today.

The current version of RSTP applies to all 211 member associations of FIFA and is not wholly prescriptive in its domestic application. Much like EU Directives, member associations are allowed a certain amount of flexibility in how they implement RSTP, primarily in relation to the transfer of players between clubs in the same country.

Some key areas regulated by RSTP include:

 registration of players (Articles 2-5)

 transfer windows (Article 6)

 loan transfers (Article 10)

 contractual stability and terminations (Articles 13-16)

 payments to agents (Article 18)

 third-party ownership (Articles 18bis and 18ter)

 

RSTP also includes some sanctions (eg. relating to termination on grounds of Articles 14 or 15) and strict controls on the transfer of minors international

What is TPO, and why is it banned?

TPO is a financial instrument which has been extensively used in South America and Europe where a third-party, usually a private investor or fund of some sort acquires either all or part of the economic rights of a professional football player for a fee from a club. In simple terms, it means that the third-party investor has a financial interest in the next transfer of a player‟s registration and would receive an agreed proportion of any future transfer. The concern is that third party investors holding these rights could exert influence on sporting decisions such as team selection and player recruitment policy, as these decisions can impact the value of the players they are “investing” in. There are two definitions which are very important for understanding TPO - federative rights and economic rights: 

 

 Contractual federative rights concern players registered with a national association recognized by FIFA that binds the player to a club. This club registration creates various duties and rights which tie directly back to the FIFA RSTP and grants them to the player.

 Economic rights are linked to federative rights and can be defined as any expected financial revenues derived from the federative relationship between player and club.

 

Logically, a player cannot have economic rights without possessing federative rights. So, the TPO investor then effectively owns a portion of the federative and economic rights of that player.

Perhaps the most notable example of this in British football was when Carlos Tevez and Javier Mascherano signed for West Ham from Corinthians, a Brazilian club, despite their respective transfer rights being owned by companies owned by Kia Joorabchan, a football agent, with Joorabchan continuing to hold an interest while the players were at West Ham. Joorabchan holding this interest was in contravention of Premier League rules. As a result, West Ham was eventually fined £5.5 million and had to pay a £20 million out-of-court settlement to Sheffield United (who were relegated from the Premier League at West Ham‟s expense).

Historically, this practice has allowed some smaller clubs to compete with bigger clubs by allowing them to purchase players for less than they would do had there not been third party investors interested in the player's sale. However, FIFA has sought to ban this sort of arrangement due to concerns over the potential influence on the sporting independence of clubs. FIFA was also concerned that this practice encouraged the use of unregistered side agreements with clubs to facilitate the flow of money out of the game.

Bodies such as Transparency International have argued that TPO effectively also reduces a player to „modern slave status‟ and encourages money-laundering. Although the former may seem an extreme argument to make given the levels of salary available to players at the highest levels of the game, the picture is not necessarily the same at the lower levels of the game, where these same arrangements can exist on a smaller financial scale. The football transfer system effectively involves the buying and selling of human beings, who although they have an element of choice as to who they work for, do not have the same contractual freedoms as other workers would with their employers. The potential for abuse is therefore an important consideration in any regulation.

How has FIFA regulated against TPO?

The 2001 version of RSTP did not initially include measures regulating TPO, but FIFA eventually sought to limit the practice through the introduction of Article 18bis RSTP in January 2008, due to the growth of TPO and the controversy surrounding the transfers of Tevez and Mascherano to West Ham. This aimed to prohibit clubs from entering into contracts that are liable to jeopardise the independence of clubs and their decision making on employment and transfer-related matters. In 2015, the regulation was changed into what is now Article 18ter to extend the prohibition to prevent players from entering into TPO contracts, in what constituted a global ban on the practice. From Art 18ter(1):

“No club or player shall enter into an agreement with a third party whereby a third party is being entitled to participate, either in full or in part, in compensation payable in relation to the future transfer of a player from one club to another, or is being assigned any rights in relation to a future transfer or transfer compensation.”

The ban on TPO was subject to a legal challenge in the Court of Arbitration for Sport (CAS) by RFC Seraing, a Belgian football club which challenged the ban on the basis that it breached EU law by restricting the free movement of capital. CAS agreed that the TPO ban did restrict the free movement of capital, but also held that Art 18ter was a proportionate method of achieving a legitimate aim by preserving contractual stability and the autonomy of club‟s recruitment policies. They also did not limit all types of investment in clubs.

Who is a Third Party?

Definition 14 of the RSTP defines a „third-party‟ as:

“a party other than the two clubs transferring a player from one to the other, or any previous club, with which the player has been registered.”

This definition would not include, for instance, a club with a right to a “sell-on fee” from a club it sold a player to, as commonly found in many transfer agreements involving lower-league clubs when selling a player to a club in a higher division, such as when Raheem Sterling moved from QPR to Liverpool. QPR were then entitled to 20% of the profit made when Sterling was subsequently transferred from Liverpool to Manchester City. On the other hand, a loan from a bank secured against a 20% assignment of a future transfer fee – functionally the same arrangement but with a bank rather than a former club - would be prohibited.

However, a literal reading of Definition 14 would also have implied that a player was a third party in his or her own transfer. This is where the issue throws up an interesting example of careless drafting producing a legal absurdity. A strictly literal interpretation of Definition 14 would prevent a player having any interest in his or her own transfer, though this was likely not the intention of the legislation.

This position of a player being a third-party in their own transfer was tested in brought against four clubs by FIFA; SV Werder Bremen (Germany), Panathinaikos FC (Greece), CSD Colo-Colo (Chile) and Club Universitario de Deportes (Peru). The FIFA Disciplinary Committee decided that the agreements in these cases were part of the remuneration due to the players under their employment relationship, such that the players could not be considered a Third Party with respect to their own future transfers. FIFA subsequently changed Definition 14 in the RSTP in June 2019 to further clarify the position. It now defines a „third-party‟ as:

“a party other than the player being transferred, the two clubs transferring the player from to the other, or any previous, with which the player has been registered.”

Although this brought much-needed clarity for players, it also caused some interesting side effects which may affect football clubs and agen

What does this mean for football clubs?

Declaring that a player is capable of directly benefiting financially from his or her own transfer fees is likely to have a substantial effect on the respective positions of the parties in transfer and contract negotiations. This change in definition allows clubs an extra weapon in their negotiation arsenal, by enabling them to negotiate lower weekly salaries with a player in exchange for a lump sum upon a later transfer. This will help clubs better manage their short-term cash flow and keep wage expenses down as it costs the club nothing during the life of the player‟s contract and is only payable upon termination of the player‟s contract with the selling club.

This may also provide smaller clubs with greater opportunity to compete with larger clubs for promising players. Where previously larger clubs could offer higher wages, smaller clubs may now be able to tempt these players with lower wages, but a lump sum on “making it big” and transferring to a larger club several years down the line. It could also help clubs to swordsportsagency@gmail.com +256 700197060

manage their salary expenditure and in turn comply with the various financial fair play rules operating in football today.

This development may also see players insisting more and more on „release clauses‟ in their employment contracts. These are clauses which obligate a club to accept any offers that reach a specified financial value. With the player potentially having an interest in the future transfer fee this creates additional considerations in contractual negotiations where the release clause fee will need to set at a level agreeable to the player and not just the club.

As a note, this is different to the „buy-out‟ clauses often referred to as a mandatory element of player contracts with Spanish clubs. With a „buy-out‟ clause, the player has to „buy out‟ their contract at the stipulated amount, though in practice, it is usually the purchasing club who pays the amount via the player. This can be a complicated process because of the practical tax logistics of a purchasing club transferring the „buy-out‟ fee to the player who will, in turn, buy out his contract. Buy-out clauses are usually set at extremely high figures, with the being the most prominent example of this.

While arguably having benefits for players and clubs, this clarification may present problems for agents, who are only entitled to commissions from a player‟s salary. An agent has a duty to negotiate the best deal for their client which may involve the player taking a cut of their future transfer fee instead of a higher weekly wage, which in turn means the agent would receive a lower commission. The direction that FIFA has taken with the regulations may effectively create a conflict of interest for agents, who have a fiduciary duty to act in the best interests of their clients, together with the proposed caps on agent commissions by FIFA which would limit an agent‟s commission from the player at 3% of the player‟s salary. This may result in side agreements where the agent (or another party) receives a cut of the transfer fee and increase the sort of „off-the-books‟ agreements FIFA was attempting to prevent in the first place.

Analysis

Although the 2019 amendment provides welcome clarification to the regulations, it does little to solve the underlying issues with TPO. Whilst any interference of third-parties in sporting decisions is unwelcome, the approach that FIFA has taken is to ignore the market realities of modern football. The football transfer market involves the buying and selling of human beings who are unable to move freely from job to job as normal employees can. They are often at the behest of a club who can set the transfer fee for mid-contract transfers at almost any level they wish, rather than any kind of rational sum (eg. requiring a buying club to compensate the selling club for the unexpired part of the player‟s contract). This system creates incentives for clubs to trade their workers for economic reasons, a phenomenon which is largely unique to sport.

The blanket ban on TPO arguably sweeps the issue under the carpet rather than make any attempt at proper, thought-out regulation of the practice. As an alternative, Nick De Marco QC argues for a system where such TPO interests are registered either with domestic football governing bodies or centrally with FIFA, together with limits on the amounts that any third-party investor can hold in a particular player. Additionally, he argues that any such investor should be subject to a similar „fit and proper persons‟ test as club owners and directors. He argues that such a system would increase the transparency of the financial eco-system around football, and in turn restore trust and reduce corruption in the „beautiful game‟.

@Mark O'Neill 

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