Formula 1 faces critical test over Financial Regulations

It is difficult to overstate the importance of Wednesday on the integrity and future security of Formula 1.

Tomorrow, the FIA is set to publish the financial certifications relating to last year’s Financial Regulations.

On the surface, it is a dry and uninteresting topic appealing only to the paper pushers, but it has a very real impact on the sport more broadly.

Last year, Formula 1 introduced rules surrounding the way teams can, and more the point cannot, spend their money.

An upper limit, set at $145 million, was introduced with a list of exclusions such as travel, marketing, driver salaries, and the top three executives at each operation.

The intent was to level the playing field and offer those at the back without the financial clout of those at the front a more equitable chance of competing for meaningful results.

To do that, their books are audited, a process that began in March and, after a delay or two, is set to reach its conclusion tomorrow with the publication of the FIA’s findings.

It was also a key topic in the Singapore paddock amid accusations that two teams had breached the cost cap figure.

There seems to be no solid foundation for those allegations beyond opinion based on observation and extrapolation from one team’s own financial position to another.

Only, no two teams are identical, and the interpretation on the regulations is open to exactly that.

The auditing process has been something of an evolving beast with the team’s financial bosses working together along with the FIA to settle upon definitions on various aspects.

It is not trivial. How is the cost of a power unit accounted for equitably for an OEM and a customer team? What about labour laws and the redundancies the larger teams have had to make – what leniency has there been for those?

What about staff who’ve been redeployed, or have tasks aside from F1; what is their value and therefore cost under the Financial Regulations?

These are high-level questions, but there has been discussion over nuances in the wording of interest only to the accounts and lawyers involved. In Formula 1, lawyers are always involved.

While that is all well and good, what happens if a team does breach the cost cap? It’s never happened before; there is no precedent.

Indeed, there are also very deliberately no defined penalties as, this being F1, teams would weigh up the cost of the penalty versus the relative gain.

Logic says there are two courses of action for any breach; a lenient approach noting this is the first time the process has ever been used or a draconian one in an attempt to set a harsh precedent and dissuade opportunists going forward.

It may be, and in all likelihood will be, that any instance is treated on its own merits without a blanket or hard and fast rule.

For instance, the classification of a staff member is different to getting a process wrong – both warrant penalty if they’re in breach, but do they warrant the same penalty? Probably not.

The devil is absolutely in the detail, but getting that wrong has dramatic implications going forward.

Turning a blind eye threatens to undermine the Financial Regulations, which currently underpin much of the sport’s strength.

Currently, none of the 10 teams has serious question marks about their ability to carry on as going concerns. Wind the clock back just a handful of years, and that was not the case at all.

Much of that is the result of the Financial Regulations limiting what teams can spend at a reasonable level, while at the same time increasing commercial confidence that the sport is more equitable – even if the usual protagonists have remained at the front (the best are the best for a reason, after all).

That could all come crashing down on Wednesday should the handing of the current process, and perhaps more specifically how any outliers are handled, be found wanting.

In true Formula 1 fashion, there will be controversy, finger-pointing, and accusations. That is the nature of the sport, it’s why the paddock is called the piranha club.

Ultimately it comes down to a simple question: did the team spend more, or less, than $145 million in 2021?

The answer will be less clear, because even if it is yes, that may not mean a team has breached the rules. This is Formula 1, after all.

There are other questions that need to be asked relating to the efficiency of the process, given it’s now 10 months since last season ended, but they will need to wait for the moment.