The Financial Regulations which are slated for introduction in the 2021 F1 season as part of the sport’s total regulatory overhaul, are in part modelled on the football’s ‘Financial Fair Play’ regulations which are designed to prevent teams over-spending in the pursuit of success.
As our annual study of teams’ budgets shows, Ferrari and Mercedes effectively spend what it takes to win, with Red Bull in a not-too distant third spot on the budget ladder. The combined annual spend of the trio roughly equals the total budgets of the remaining seven teams.
In football, too, the top teams vastly out-spend their smaller rivals. Last week the Union of European Football Associations found reigning Premier League champions Manchester City guilty of a breach of their regulations. UEFA’s adjudication panel found the club, which is owned by the UAE’s ruling family and sponsored by the nation’s Etihad airline, fudged sponsorship income and shareholder contributions in order to disguise certain revenue streams.
City were banned from UEFA’s competitions – including the prestigious Champions’ League – for two years, and fined around $30 million. The club has appealed against the verdict, and announced it will take the verdict to the Lausanne-based Court of Arbitration for Sport, the ultimate arbiter of global sport disputes.
The football club said it was “disappointed but not surprised” by UEFA’s decision, suggesting the body acted as accuser, prosecutor, judge and jury in the matter, and that it did not receive a fair trial. “The club has always anticipated the ultimate need to seek out an independent body and process to impartially consider the comprehensive body of irrefutable evidence in support of its position,” it said.
With Formula 1 poised to introduced similar regulations to those City fell foul of, obvious parallels can be drawn. Teams controlled by larger entities could source goods or services from affiliates, then disguise true their value.
Of course this is not to suggest that any teams would wilfully breach the regulations in this manner. But the possibility remains that they could.
There would be obvious temptations and opportunities for the three manufacturer-owned teams to do so. F1 also has two teams which share the same owner who could share developments costs but understate the costs. Alternatively, ‘B-teams’ could acquire technologies from their supplier teams at below cost.
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The F1’s governing body, the FIA, working in conjunction with commercial rights holder Liberty, believe they have plugged all potential loopholes. But only time will tell whether they have. And football is not the only sport which has penalised competitors for breaching financial rules.
Much as the FIA is F1’s regulator, so UEFA is (European) football’s governing body, and thus the verdict begs the question: Would the FIA act similarly in the event of breaches, which could in turn effectively ruin teams? Consider how it acted in 2007 when McLaren were fined $100m and excluded from the results of that year’s constructors championship for its role in the infamous ‘Spygate’ saga, receiving what to many remains a grossly disproportionate sanction handed down by a World Motorsport Council then presided over by Max Mosley.
Things have changed since then. For 2021, the FIA has devised a Cost Cap Adjudication Panel similar in structure to the UEFA equivalent, but with the (independent) FIA International Court of Appeal as top judicial layer.
The ICA rotates the international judges it appoints as per the FIA’s statutes, which were in turn revamped under president Jean Todt after he assumed office in 2009. Thus these bear no resemblance to the processes that prevailed during Spygate.
However, given the potentially serious implications of the sanctions permitted, it is imperative that any breaches that may arise are dealt with fairly, swiftly, consistently and without fear or favour to prevent accusations that the Adjudication Panel is its own accuser, prosecutor, judge, jury and appellate division.
That said, as in football, the Court of Arbitration remains the final option.
During an exclusive interview with this author in December, F1 managing director Ross Brawn stated the sport intends to monitor teams’ spending on an ongoing basis to minimise the possibility it might have to resort to the nuclear option of stripping a team of a title. A voluntary dry-run of the regulations will be instituted this year to iron out any loopholes.
Rather than risk sanctions F1 teams should participate and cooperate fully, then respect the term and spirit “fair play” and act within the rules. As the City case illustrates, the overall costs of any financial breaches could be absolutely devastating in a sport that desperately needs to retain all current competitors.
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2020 F1 season
- Pictures: Wrecked chassis from Grosjean’s Bahrain fireball crash to go on display
- Bottas vs Rosberg: Hamilton’s Mercedes team mates compared after 78 races each
- F1 revenues fell by $877 million in Covid-struck 2020 season
- Hamilton and Mercedes finally announce new deal for 2021 season
- F1 audience figures “strong” in 2020 despite dip in television viewers
32 comments on “Why F1 should pay heed to Manchester City’s two-year ban”
18th February 2020, 12:11
It is not possible to monitor. Period.
All these “audits” undertaken by “trusted third-party” audit companies are as unreliable as from any stranger on a street.
How many banks (and their audit companies) have been caught pants down in the last 10-12 years only because of some huge mess up, subsequent leaks, whistleblowing and so on? And never because the reporting showed how corrupted they are?
All of them (major, top 20, globally).
Now think what will happen to Factory Teams, which can hide their assets much-much better (as they can spread any expenditure anywhere)?
FIA\Liberty will learn it soon enough.
18th February 2020, 12:16
I think this the problem Liberty/FIA will face. The manufacturers have road and race divisions, how do you tell them that they have to list all developments made under the race one when for some of them the technology they use in racing applies to some of the cars they build for the public. I’m not suggesting whole scale cheating will occur but they have the ability to move costs associated with parts to another area in the company.
18th February 2020, 12:58
The fact that monitoring doesn’t catch companies doesn’t mean that it doesn’t work. It may also mean that it succesfully prevents all the trespassing that *could* be caught by monitoring. Without the monitoring, there would probably be a lot more trespassing of the rules going on. For the things that monitoring can’t catch, we rely on whistleblowers and the like. All that, plus the occasional setting of an example, may actually keep the teams in line.
18th February 2020, 13:28
Not many actually, and the time where it did happen it also brought down the auditing company with it, in the Enron case.
Also wanted to point out that UEFA found the breach in Man City in part due to asking a third party auditor.
18th February 2020, 14:07
You’re too emotional, @dallein. Period. Full Stop. Point. Dot. End of Sentence.
And if you believe that all 20 top banks were caught cheating (I doubt it), then you’ve proven yourself wrong. It merely proves that the monitoring – auditing aided by leaks and whistleblowing – works.
The big challenge is (and that’s what this article is about) to penalise the offenders harshly and be consistent. That might be the week spot though for FIA/FOM (not sure who is responsible for this).
18th February 2020, 19:49
@yaru, within the UK, there has been considerable criticism about the fact that the audit industry is dominated by just four companies – Deloitte, PricewaterhouseCoopers, KPMG and Ernst & Young – who form an oligarchy that dominates the UK audit industry.
To put it in perspective how dominant those four companies are, in 2018 – the most recent year where figures are available – if you took the top 30 largest auditing firms in the UK, the smallest of the “Big Four”, which was KPMG, earned more in fees than the next 26 largest audit firms in the UK combined.
Every single FTSE 100 company was audited solely by one of the “Big Four”, only 4% of companies in the FTSE 250 was audited by somebody other than the “Big Four”: in total, it’s estimated that the “Big Four” audit about 87% of all UK companies, such is their dominance of that sector.
If companies do ever switch from one of the “Big Four” to another audit firm, about 95% of the time they will switch to another one of the “Big Four” – and, currently, in the UK a company can use the same audit firm for a decade before they have to switch to another auditor, meaning the industry is quite stagnant and has very little independent oversight.
I bring those points up because the same “Big Four” audit firms have been criticised for years, if not decades, for lacking independence from major companies and for producing poor quality audits – to the point where the Financial Reporting Council, which regulates auditors in the UK, accused Deloitte of having a “reckless” attitude towards their work last year.
The Financial Reporting Council was scathing in general about the lack of quality in the UK audit sector in 2019 – in that report, they complained that all of the “Big Four” had failed to objectively scrutinise companies or had shown instances of failing to challenge managers during audits.
More worryingly, the FRC estimated that at least a quarter of all audits undertaken in the UK on the largest 350 companies in 2019 failed to meet quality standards, with all of the “Big Four” falling quite far short of hitting the required quality targets.
One of those four – KPMG – is still under high level scrutiny from the Financial Reporting Council, whilst the Securities and Exchange Commission hit KPMG with major fines after catching them stealing information from the PCAOB – which was set up after the Enron scandal to try and prevent a repeat of it – and then using that stolen information to edit some of their former audits when they realised they’d been caught producing audits with fake information in them.
The UK audit industry, in short, has been condemned for lax standards, corruption, fraud and criminal behaviour for years. To be brutally honest, even if the teams were not intentionally setting out to cheat, when the FRC is complaining that about a quarter of all audits in the UK are substandard – and the majority of the teams in the sport are based in the UK – it raises serious questions about whether the teams could even rely on an independent audit being done properly in the first place.
19th February 2020, 2:33
Football Leaks was the Whistleblower,
18th February 2020, 22:04
It IS possible to monitor. Period.
Besides, even if the teams manage to cheat a little, the budget gap will still be massively smaller than it is now. With teams spending around half a billion per year and others outside the top three at 200 or less.
18th February 2020, 12:17
Man City claim to have done nothing wrong, and to have been unfairly discriminated against.
Not only is their case in that respect not easily dismissed, but they have promised to take it much further than CAS, who are by no means the ultimate arbiter.
Unless UEFA negotiate a deal, City will get the punishment suspended until the case is complete, and then spin out the case for a decade or more.
It’s a bit soon to say what this demonstrates, if anything, about the ability of organisers to regulate. But it isn’t encouraging.
Have a look at the Omer Riza case for an example of how long this can all take – as well as for a key ruling which is specifically relevant to City’s case.
18th February 2020, 13:22
Plus it was only uncovered from leaked emails. However any fool could look at where city went from and too in terms of revenue. From top 10 in the EP to top 6 in Europe. Im no accountant but it wasn’t all prize money and now we know it wasnt
18th February 2020, 12:23
Aside from the financial fine and the 2-year exclusion from all European competitions that UEFA (European governing body) charged Manchester City, in the period that they were found guilty (2012-2016), they also won the English Premier League in 2014 by just 2 points. The FA (English governing body) could in addition fine Manchester City with points deduction from the national league for the same period and therefore lose a championship due to this.
If FIA use a similar system, we could end up with a team winning the championship in 2021 and if they are found guilty of breaching the Budget Cap 2-3 years later, they could lose that championship…and therefore Ferrari might actually win one by accident :P
18th February 2020, 15:00
@black – The FIA will use a similar system, and the window for exclusion due to cost cap infringements is five years. What you’ve written is possible, Dieter did a piece on it recently. Brawn has indicated that audits will be an ongoing process, so as to minimize surprises later down the line.
Quoting from the linked article:
18th February 2020, 12:43
Football rules have been in place for a long time. F1 is just attempting this for the first time and teams will make a lot of mistakes initially before they are able to implement the rules strictly.
18th February 2020, 15:01
Very true. And that’s one of the reasons why there’s a dry run in 2020, to help get the teams up to speed.
18th February 2020, 13:36
English football is very different to F1. The teams keep all of their gate, kit sales & sponsorship money, plus they have a proper share of the TV rights. No company gets to skim 50% of the income from football before the teams see the money. No football team is paid a bonus for being around for 70 years. The share out isn’t a secret.
Money wise that means every team picks up over £100m from the TV rights + whatever they get from sponsors and spectators. Considering they only need to maintain a couple of grounds and pay wages to 100 or so people, that’s a lot of money. There’s no real need to fiddle the books, but some do.
Footballers are paid a lot of money – the top 20 will all earn more than most F1 drivers.
If LM want to draw comparisons with football, they need to pay the teams a lot more.
18th February 2020, 14:22
who would have ever guessed that dealing with dodgy autocrats who only exist because of their immense corruption and cruelty of selling their countries’ resources (oil) like the criminal families of Qatar, Abu Dhabi and Saudi Arabia would end up in tears??
A pity that some of our favourite sports like football and F1 became part of the sport-wash mechanism of the Arab debauchery. Useful reading about this here: https://www.theguardian.com/football/2020/feb/17/manchester-city-backers-are-not-the-sort-to-take-punishment-lying-down
18th February 2020, 14:58
How to stop F1 teams from overspending? Incentivize it.
Offer whistle-blowers guaranteed legal defense and a large informant award, enough for the informant to retire on.
Bar Room Lawyer
18th February 2020, 17:24
Would not Rugby Union and Saracens Premiership team’s breach of the salary cap be a better example.
Fined £5.4 million and 35 points deducted, which means they will be playing in the next division down next season.
Thing is I can’t imagine any manufacturer, Mercedes, Renault, Honda or Ferrari staying in the sport if relegated to F2 instead, or supplying a customer team to compete there.
Fer no.65 (@fer-no65)
18th February 2020, 18:53
It’s impossible to police. No matter how hard they try. There’s always a way to cheat, specially when money is involved. No one plays a fair game there… specially, in the case of football, their crook organizations. The FIA isn’t free of blame, either, McLaren got a 100 million fine for spygate but Renault got a 2 year suspended sentence for Crash-gate (and even less of a penalty when they were also found guilty of cheating in 2007). And let’s be honest, neither came as a result of FIA’s own investigation, it needed inside help for the facts to be released…
AND while both suffered finantial blows (sponsors or prize money), the results stayed! sure, McLaren was disqualified from the WCC, but Hamilton or Alonso were a point away from getting the WDC in a “cheater car”. And Renault and Alonso still keep that Singapore 2008 trophy.
Given that evidence, I have no confidence in the FIA trying to police something way out of their league, with more implications than anything else on the planet…
18th February 2020, 20:15
@fer-no65, you could also point to the 2004 Toyota-Ferrari scandal, when it emerged that Ferrari filed criminal charges against multiple former employees who’d been caught taking information on the F2003-GA to Toyota, with the allegation that the TF104 used data taken from the F2003-GA.
Two engineers – Mauro Iacconi and Angelo Santini – were subsequently convicted and given 16 month and 9 month jail sentences respectively after being convicted on industrial espionage charges. Charges were brought against Ove Andersson, Gustav Brunner and Rene Hilhorst – former team principal, chief designer and head of aerodynamics respectively – by the German police as well, although the prosecutors did eventually drop that case. It has to be noted that all three of them were reported as leaving Toyota around that time, which is perhaps not coincidental – although Hilhorst does seem to have rejoined Toyota at a later date.
Now, despite the fact that you had two engineers convicted in a court of law of industrial espionage and another case that was raised against senior members of Toyota, the FIA never took any action against Toyota over that case.
18th February 2020, 20:36
@fer-no65 , I’d love to concoct a blather about F1 being a team sport, tactics being part of it’s DNA etc etc to justify sacrificing 1 car to gain a win by the other, but it’s too early in the morning to ensure that the users of such excuses wouldn’t take it seriously and use it to justify further unsporting activities.
18th February 2020, 19:06
“And let’s be honest, neither came as a result of FIA’s own investigation, it needed inside help for the facts to be released…“
Ergo, it’s easy to police; all you need is staff switching teams/ whistleblowers.
Aussie Rod (@aussierod)
18th February 2020, 21:17
I keep coming back to the fact that even if a team deliberately and fragrantly breached the cost cap, say to the tune of 50% (a massive breach that should rightly be punished) the grid would still be multiple times more equitable than the status quo, where the big teams outspend the others by factors of 3 or 4 or more.
In a few years the cost cap will ensure the grid is much more even than today, cheating or not.
18th February 2020, 22:08
GT Racer (@gt-racer)
18th February 2020, 23:08
An interesting conundrum that somebody brought up to me not too long ago is what would happen if a team/manufacturer that was entered in another championship did development on something for that other championship & then transferred what was learnt to the F1 team when a majority of the R&D money had been spent within that other category.
For example what if Mercedes spent a lot of money developing something new with the hybrid system for use in Formula E but then were able to transfer that system or at least a lot of what was learnt to the F1 team with the F1 team not having to spend a penny on development yet ending up with a big performance gain.
And it doesn’t even need to be an actual component. What if they have an engineer who is able to transfer knowledge from one program to the other with the end result been the F1 team at no extra cost suddenly has a trick deployment or energy regeneration map.
I know there are more than a few within multiple F1 teams who are fully expecting a big controversy, Maybe not in 2021/22 but a few years down the line because that will be when the potential gray areas will become apparent & when every team on the grid will start to see where they can play the system & anybody that thinks they won’t has never been around the F1 paddock that is full of people who’s job it is to look for any advantage regardless of if it’s within the spirit of the regulations or not.
As the saying goes, Read the rules once to know the rules & then read them a 2nd time to look for ways to play them. That’s just the name of the game & that isn’t going to change even if you have all the teams claiming they will play nice.
19th February 2020, 0:15
@gt-racer But using that route means spending a lot more to run a team in another championship. More so if they want to run it underhandedly so they don’t even get the marketing benefit (e.g. Ferrari is not running with any Ferrari branding). If they go with that route, I think it’s still better overall since other racing series got another serious competitor which means it’s better for us. Also it won’t be that simple since regulation and technology level of F1 is vastly different from other series. Having 13000 rpm engine would definitely raised many eyebrows in other series.
19th February 2020, 0:33
Farsical, manipulative text. Right from FIA apparatchik mouths. it is noted that the author does not makes even any effort to determine what loopholes that said rules have.
Jimmi Cynic (@jimmi-cynic)
19th February 2020, 2:21
Near as I can tell, next year Ferrari will be over the cost cap with just the PMI money and Liberty payments.
It would be catastrophic for Liberty to punish Ferrari in any meaningful way. Therefore, I expect to see Ferrari to employ the biggest contingent of ‘Hospitality Engineers’ who devote their talents to making air molecules comfortable while being pushed aside in the least draggy, most hospitable manner.
Also, would Liberty/FIA actually punish RBR severely if found to be over-spending? Or Mercedes? If Haas or Williams over-spent, sure the gavel of FIA selective justice might strike hard, but first those teams need to find some funds to get up to the cap ceiling.
Also… why isn’t there a cap floor? A minimum spend. Is it because the Big 3 wouldn’t be happy about spending more on their satellite place-filler teams?
I expect the cap will be mainly be a benefit for Brawn’s Liberty PR mandate. And will be enforced with a big dash of paddock honor-system mixed with mild wrist-slapping.
19th February 2020, 2:33
“Would you like a drink with your vortex?”
19th February 2020, 5:00
I think you’ll find the cap was derived by working out what Ferrari’s spend was after deducting the costs of drivers, management and hospitality:)
The fact is that most teams will take a long while to actually get to the cap so the big 3 will remain the big 3 for quite a while and the competition will be pretty much the same.
Love to be wrong but I guess we’ll see how 2021/2022 pan out
19th February 2020, 5:34
Could you imagine Formula 1 without Ferrari for 2 seasons ( were anything to come to pass that is ?)
I couldn’t !
Formula 1 would not survive!
19th February 2020, 15:15
3 million “bounty” to whomever leaks budget cap misconduct, paid by the team who’s doing the wrongdoing.
Comments are closed.