UEFA Financial Sustainability rules explained: From Financial Fair Play to the new Squad Cost Ratio

In one of our recent articles, we explained the new financial rules of the Premier League and La Liga’s squad cost limit. In addition to individual league regulations, there are also UEFA rules that apply to clubs participating in European competitions. In this article, we explain what rules UEFA has for clubs and how these have developed in recent years, from the original Financial Fair Play rules to the current regulations.

 What was Financial Fair Play? Origins, goals and core requirements

The first financial rules were originally introduced for the 2010/11 season under the well-known name of Financial Fair Play. These remained in force until the 2021/22 season. When the UEFA Executive Committee decided in September 2009 to introduce the then new Financial Fair Play rules, the aim was to curb the clubs’ steadily worsening financial problems. Financial Fair Play refers to three core areas that a club must comply with in order to avoid being penalised by UEFA. Basically, every club must comply with UEFA’s club licensing regulations. These regulations examine sporting, infrastructural, personnel/administrative, legal and financial criteria. Sporting criteria, for example, relate to youth teams, medical care and contractual requirements with players. Infrastructural criteria relate to training facilities and a stadium certified for UEFA competitions. Personnel/administrative criteria relate to the qualifications of coaches, doctors, physiotherapists and fan representatives. In order to meet the legal criteria, certain basic requirements must be met, such as entry in an official register or the presentation of a legal corporate structure. The financial criteria require, for example, interim and annual financial statements.

The two other key areas for complying with UEFA’s old financial rules relate to the original Financial Fair Play regulations. The first point is the obligation for clubs to show a balanced budget over a period of three years. This basically means that any club that has participated in a European competition up to the 2021/22 season must not have posted a negative result in the three years prior to participating in the competition. UEFA allows an acceptable deviation of €5 million, which may be increased to up to €30 million at the discretion of the Financial Committee. All income and expenditure must also be calculated at the fair value of the transaction, which means, for example, that transfer fees for players are amortised over the years of the contract term and reported in the balance sheet on a straight-line basis, while income from player transfers, for example, is counted in full in the year of sale. The income in the calculation refers to all income from admission fees, sponsorship/advertising, broadcasting rights, commercial rights, UEFA solidarity contributions, prize money and other operating income. Expenses include cost of materials, personnel expenses, depreciation/impairment of tangible assets, amortisation/impairment of intangible assets and other operating expenses.

The final core area relates to the requirement to always comply with UEFA regulations regarding transfer and salary payments. This encompasses several rules. Clubs must not have any outstanding liabilities to other football clubs. In addition, clubs must not have any outstanding liabilities to employees or social security institutions/tax authorities. Simply put, clubs are obliged to pay salaries to players and other employees on time, to pay the statutory social security contributions and to pay the agreed instalments for transfer fees on time.

How the Squad Cost Ratio works and what the new Financial Sustainability Regulations change

Since the 2022/23 season, Financial Fair Play is no longer valid and has been replaced by the Financial Sustainability Regulations with Squad Cost Ratio. The Financial Sustainability Regulations (FSK) are based on the old Financial Fair Play. The FSK is also based on three pillars. These are similar to the core areas of Financial Fair Play. The first of the three pillars is the regulation on overdue liabilities. As in core area 3 of Financial Fair Play, clubs are prohibited from having overdue liabilities to other football clubs, employees, social security institutions/tax authorities and UEFA itself. Liabilities due by 30 September or 31 December must be settled by 15 October or 15 January at the latest. If payment is made more than 90 days after the due date, this may be considered an additional aggravating factor by the UEFA Financial Control Chamber for Clubs and have a negative impact on a club’s overall assessment.

The second pillar describes financial stability and defines football revenue. Here, the rules prescribed in core area two of Financial Fair Play have been slightly adjusted. The originally approved deviation of 30 million euros has been increased to 60 million euros. For clubs classified as financially healthy by UEFA, the deviations per year in the period under review (still three years) may be increased to €10 million each, potentially totalling a further €30 million. In addition, clubs’ costs for relevant investments, such as infrastructure or youth development, must be covered by equity capital or additional contributions. This is intended to shift the focus of the financial rules from debt to equity stability.

The third and final pillar relates to the so-called squad cost ratio. This stipulates that a maximum of 70% of club revenue may be spent on salaries and transfer fees for players, coaches and player agents. Revenue and expenditure continue to be calculated and counted according to the categories described above. As part of the introduction, 90% of club revenue was granted for the 2023/24 season and 80% for the following season.

According to UEFA, the new rules should lead to earlier detection of violations and better punishment of them. This is doubtful, as UEFA has punished violations of financial fair play rules very differently in the past. In many cases, supposedly smaller clubs were severely punished and in some cases even excluded from European competitions, while large clubs from the top five leagues were not excluded for violations and had to pay fines or make do with smaller squad limits at most. The sanctions available to UEFA generally range from simple warnings and fines to squad size restrictions, point deductions and exclusion from competitions.