After a decade of many clubs losing money and sometimes even going into administration, UEFA decided something had to change. It introduced Financial Fair Play, also known as FFP.
FFP rules state that clubs cannot spend more than their revenue. Sponsorships are an exception, but only on a case by case basis.
UEFA’s FFP Rules
In order to combat the capitalist gluttony that threatens the humble foundations in football, UEFA implemented a set rules called Financial Fair Play (FFP). These rules aim to promote sustainability and to prevent financial doping. Unfortunately, the effectiveness of this initiative is stifled by the fact that many clubs – particularly those not owned by wealthy benefactors – are still allowed to spend more than they earn.
To avoid this issue, a club needs to be at least break even in two of the last three years before it applies for its UEFA licence. This is usually achieved by reducing the expenditure on transfers, employee benefit costs, and finance costs, while increasing revenue from matchday revenues, TV revenues and advertising, player sales and prize money. Investing in women’s football, stadium and training facilities, community initiatives, and youth development is also considered healthy spending that does not count towards a club’s FFP calculations.
However, even this is a stretch for some clubs, especially in the case of smaller leagues. In the English Championship for example, the Premier League rules on transfers are much more lenient that those of UEFA, and allow therefore more extravagant expenditures. Ultimately, this leniency undermines the integrity of the system. If a club is to be taken seriously, UEFA must either make its rules stricter or let clubs go bankrupt and restart with a clean slate (while maintaining their name). If not, the credibility of FFP could quickly be lost.
UEFA’s Break-Even Requirement
UEFA’s financial fair play regulations aim to ensure that clubs do not spend more than they receive. This is achieved by assessing the income of each club and subtracting all costs, including debt. The club can then use the remaining amount to pay salaries. While some critics of the rules claim that they discourage innovation and are harmful to the development betting on football of football, others argue that regulating club spending is an important part of the game’s long-term health.
To comply with FFP rules, clubs must be able to break even over the three assessment periods which make up a year. It must also prove that it has not accumulated any overdue payments to other clubs, to players or to social/tax authorities. The goal of these requirements is to prevent the accumulation of losses that could lead to unmanageable debt.
To encourage investment in training facilities, stadiums and youth development, these expenses are all excluded from the calculation of break-even. Equity participants (i.e. the club’s owners or investors) may also deduct up to EUR5 million in aggregate deficit over a rolling assessment period.
If a club does not meet the FFP requirements, it can be sanctioned by UEFA. However, there is a settlement option that allows for a delay in the application of sanctions, providing that the club can demonstrate that it has a plan to become compliant within a specified time period.
UEFA’s Acceptable Deviation Requirement
The idea behind UEFA’s new rules is to prevent clubs from spending more than they earn. This is important to safeguard the existence of football clubs and prevent them from going bankrupt and being replaced by another club with more money. To achieve this, UEFA rules stipulate that a club must not have its expenses exceed its revenue over a rolling period of three years.
This rule is referred to as the squad cost ratio and is one of the key new features in the FSR. This rule is intended to combat rising agent and player costs, which may threaten a club’s financial sustainability over time. The squad cost ratio is calculated as a club’s total player salaries and agent costs divided by its aggregate revenue (matchday income, TV revenue, advertising, finance costs, dividends, prize money and transfer revenue). This figure cannot exceed 70% of the club’s average annual revenue.
While UEFA’s squad cost ratio rule is intended to encourage more organic football club investment, it could also negatively impact the competitive balance of European football. Research by Dimitropoulos et al. The research by Dimitropoulos et al. shows that English and German clubs tend smooth out their reported numbers to meet UEFA requirements. This can reduce the validity and accuracy of their reported breakeven numbers, leading to a market distortion as clubs are unable to make informed investment decisions based on actual performance of clubs in their leagues.
The UEFA Maximum Aggregate Debt Requirement
The idea behind UEFA’s FFP rules is that they level the playing field financially in football by forcing clubs to spend only what they earn. This, in principle, eliminates the sugar-daddy owner and prevents rich kids buying players with oil funds.
The new UEFA regulations will enter into force in 2021 after a buffer period. The new regulations will be much stricter than the previous ones and will consist of three main pillars, namely a solvency pillar (a pillar for debt), a squad costs pillar (a pillar for squad costs), and a debt pillar.
In terms of the solvency pillar, a club can only spend EUR5 million more than it earns over an assessment period (three years) if all expenditure other than for transfers and player wages is directly covered by financial contributions/payments from the club’s owners or their related parties. This prevents unsustainable debt accumulation and allows investment in stadiums and training facilities as well as youth development and women’s football.
In the same way, a club’s debt pillar should be sustainable and its overall indebtedness must remain low. A club must also not owe any money to another club and have enough equity at all times to cover its debts. The newest rules also prohibit a club from selling its star players to non-European clubs.
