The FIA announced on October 10, 2022 that two teams – Red Bull and Aston Martin – were found in varying types of breaches of the cost cap rules, so how will the governing body sanction those breaches?
It is obvious that Monday’s FIA disclosure relating to the issuing of Formula 1 cost cap certificates of compliance has frustrated many, with inferences abounding that the sport’s governing body is incompetent, using smoke and mirror tactics, and even that ensuing process might be nothing more than a structureless kangaroo court, but if those annoyed took the time to be more informed they might realize that the reality is quite removed from what they initially thought, as is often the case when people are annoyed.
Being critical of the FIA F1 Financial regulations because one hasn’t taken the time to understand them is simply feeble, but this piece will attempt to provide a better understanding of them in the context of this week’s happenings.
The F1 Financial Regulations are clear, succinct, transparent, and fair, but will most certainly whack any team endeavouring to maliciously cheat.
F1 financial regulations administered under an open book policy
The principles and processes under which the F1 cost cap is administered are defined in the FIA F1 Financial Regulations that are published and freely accessible to the general public on their website, and they define two reporting periods for any given year, an interim report, and a full end of year report.
From a fundamental perspective, though, it is critical to acknowledge and understand that the F1 cost cap is administered under an open book policy, and to the standards of the globally recognised body, the IFRS – International Financial Reporting Standards.
In the context of the F1 cost cap, operating and reporting under an open book policy infers full transparency, it means that a team must be ready for, submit to receiving, and assist the Cost Cap Administrators for the purposes of a financial audit at any time at the FIA’s discretion. Further, open book policy requires that the teams self-audit at agreed intervals and be able to provide objective evidence of having done so.
Procedural and Minor Overspend Breaches
The FIA disclosed on Monday that for the 2021 full year reporting period, both the Aston Martin and Red Bull Racing teams have been found to have committed procedural financial regulation breaches, and that Red Bull had also been found to have committed a minor overspend breach.
Examples of the procedural breach are instances such as late submissions, delaying or impeding the reporting process, and submitting misleading or incomplete documentation, and will generally result in a financial penalty unless there are further mitigating or aggravating factors.
A minor overspend breach is found to have been committed when a team has itself reported to have or the administrators have found the team to have exceeded the cost cap by under 5%, with sanctions to include financial penalties and minor sporting penalties.
The FIA F1 Financial Regulations do not quantify the level of any financial sanctions that may be applied for any breach.
The Accepted Breach Agreement
In accordance with the regulations, any team that has been found to have committed a minor overspend breach will be given the opportunity to enter into an Accepted Breach Agreement (ABA).
If a team that has committed a minor overspend breach decides it is willing to enter into an ABA with the FIA it first must acknowledge that it has breached the financial regulations; accept, observe, and satisfy the sanction(s) and/or enhanced monitoring procedures levied; agree to bear the costs detailed in the ABA; and waive its right to challenge the ABA.
Once the ABA has been agreed and prepared, the Cost Cap Administration will publish a summary of the terms of the ABA, detailing the breach, any sanctions, and any enhanced monitoring procedures, omitting any confidential information.
If a team that has committed this type of breach is unwilling to enter into an ABA the matter will be heard by the FIA’s Cost Cap Adjudication Panel, surrendering any right of appeal.
The regulations state that an ABA may set out certain obligations or conditions to be fulfilled or satisfied by the relevant F1 team, either within a specified timeframe or on an ongoing basis; and/or provide for enhanced monitoring procedures to be put in place in respect of that team; and/or impose any financial penalty or minor sporting penalties that would be available to the Cost Cap Adjudication Panel pursuant to Article 9 in respect of the relevant type of breach, save that the Cost Cap Administration shall not be entitled to impose the minor sporting penalties specified in Articles 9.1(b)(ii), 9.1(b)(iii) and 9.1(b)(vi); and/or set out details of the costs to be borne by the team, calculated by reference to the reasonable costs incurred by the Cost Cap Administration in connection with any investigations into that F1 Team’s compliance with these Financial Regulations and/or the preparation of an ABA.
Minor Sporting Penalties
The minor sporting penalties in Article 9 are as follows:
A “Minor Sporting Penalty”, meaning one or more of the following:
(i) public reprimand;
(ii) deduction of Constructors’ Championship points awarded for the Championship that took place within the Reporting Period of the breach;
(iii) deduction of Drivers’ Championship points awarded for the Championship that took place within the Reporting Period of the breach;
(iv) suspension from one or more stages of a Competition or Competitions, excluding for the avoidance of doubt the race itself;
(v) limitations on ability to conduct aerodynamic or other Testing; and/or
(vi) reduction of the Cost Cap
Aggravating and mitigating considerations
There have been many comments made in the media this week regarding what considerations the FIA should give when considering the application of sanctions, specifically that a financial penalty for a cost cap overspend at any level is no effective penalty at all because all it does is increase the overspend, but it is important to acknowledge that most forms of modern judicial convention only consider cause considerations as mitigable, and not those of effect because they come after the fact.
In accordance with the FIA F1 Financial Regulations, mitigating and aggravating factors are considered by the Cost Cap Adjudication Panel when they are applying penalties.
Examples of aggravating factors include any element of bad faith, dishonesty, wilful concealment, or fraud; multiple breaches of the regulations in the reporting period in question; breaches of the regulations in respect of a previous reporting period; quantum of breach of the cost cap; and failure to co-operate with the Cost Cap Administration.
Examples of mitigating factors include voluntary disclosure of a breach to the Cost Cap Administration; track record of compliance with the regulations in previous reporting periods; unforeseen force majeure events; and full and unfettered co-operation with the Cost Cap Administration.
What does all this mean for Aston Martin and Red Bull?
Insofar as Aston Martin’s procedural breach is concerned the sanction will most likely be a financial one unless there are mitigating or aggravating considerations that the FIA accept as valid.
With respect to Red Bulls procedural and minor overspend breaches; so long as there aren’t extenuating factors to be considered, the FIA would now be in the process of entering into an ABA with them, the penalties for which, according to the regulations, will include financial penalties, and minor sporting penalties, but will not include deduction of 2021 Drivers’ or Constructors’ points, and will not involve a reduction in their 2022 cost cap.
If Red Bull can not come to an agreement under the ABA with the FIA, then the matter will be heard by the FIA’s Cost Cap Adjudication Panel.