5 minute read 30 May 2022
soccer

EY Snapshot into UEFA’s newly introduced Club Licensing and Financial Sustainability Regulations

Vassilios Koutsogiannakis
By Vassilios Koutsogiannakis

Senior Manager, Sports Desk Legal Services | EY Switzerland

Dedicated lawyer who enjoys combining his passion for sports with his profession to provide exceptional legal services to his clients.

5 minute read 30 May 2022
Related topics Media and entertainment
Upvote

Show resources

On April 7, 2022, the UEFA Executive Committee approved a new set of financial regulations, namely the UEFA Club Licensing and Financial Sustainability Regulations (‘UEFA CLFSR’) that constitute a sweeping overhaul of UEFA’s financial regulations (‘UEFA FFP’) since their inception in 2010.

In brief
  • With the new UEFA Club Licensing and Financial Sustainability Regulations, European football clubs that have been admitted to the UEFA club competitions can incur higher losses than the permissible losses under the former regime.
  • The permissible losses are outweighed by the cap imposed on the expenditure pertaining to players’ salaries and to the transfer and agents’ fees.

T

he new regulations have a multi-dimensional approach, with two core elements: namely, (a) club licensing (Arts. 5-74), and (b) club monitoring (Arts. 75-96). Club Licensing controls access to the UEFA club competitions, whilst Club Monitoring is intended to ensure clubs that access said competitions operate in an appropriate manner on an ongoing basis.

At the epicenter of the new regulations is, inter alia, financial sustainability and rationality of football clubs partaking in the UEFA club competitions. Bottom-line, their purported objective is to preserve the sportive equity. This objective may be brought into fruition through three pivotal pillars, that constitute integral parts of the UEFA club monitoring process, that is:

  1. solvency;
  2.  stability; and 
  3. cost control.

These club monitoring requirements shall be adhered to by all the football clubs that have been admitted to the UEFA club competitions (i.e., UEFA Champions League, UEFA Europa League and UEFA Europa Conference League).

The UEFA CLFSR will come into force in June 2022, whilst their implementation will span over three financial years as to enable clubs to adapt accordingly.

The purpose of this blog is to cast a glance and outline, on a high-level basis, the three foregoing core pillars.

  • Solvency (Arts. 80-83)

    One may contend that this pillar departs from the assumption that liquidity shortfalls may inevitably lead to overdue payables. Therefore, this pillar may be construed as dictating that clubs should meet all their payment commitments towards their creditors (i.e., football clubs, the clubs’ employees, the social/tax authorities, and UEFA) in a timely fashion. It is noticeable that football agents are left out of the equation.

    The clubs’ compliance with this requirement will be monitored closely – controls are to be undertaken on a quarterly basis whereas, apparently, there would be less leniency towards late payments (i.e., payables that are not settled on the due dates, that is 15 July, 15 October and 15 January).

  • Stability – the ‘football earnings rule’ (Arts. 84-91)

    As per the so-called ‘football earnings rule’, where the club’s ‘relevant income’ exceeds its ‘relevant expenditure’ (aggregate football earnings surplus) in respect of a single reporting period, this implies financial stability. Be that as it may, clubs may report an aggregate football earnings deficit (i.e., negative aggregate football earnings) or, put it simpler, record a negative balance and still be compliant with the football earnings rule. This requirement, with which UEFA ushers into an updated version of the break-even requirement, arguably aims at avoiding costs outstripping income.

    Clubs that bear employee-related costs of less than EUR 5 mio are ‘carved-out’ from the football earnings rule (admissible deviation). Conversely, EUR 5 mio constitutes the threshold that once exceeded, it triggers the necessity to be aligned with the prescribed stability requirement. However, the allowable deviation may extend up to a maximum of EUR 60 mio over a period of three consecutive financial years/reporting periods (monitoring period) prior to the season in which entry into the UEFA club competitions is sought, so long as the EUR 55 mio is covered by equity contributions.

    It is of particular interest that equity contributions do not have a stricto sensu shareholding element as they may extend to monies received from third parties, for example, in the form of donations or debt waivers. Further down the line, the acceptable deviation can be stretched up to an extra of EUR 10 mio per reporting period, which may be deemed permissible so long as the club at stake is thriving and presents “impeccable” and sound financial status.

  • Cost control – the ‘Squad cost rule’ (Arts. 92-94)

    The Squad cost rule aims at putting a brake on excessive spending as it compels clubs to constrain their spending appetite in terms of player wages, transfer fees and agents’ commissions. The squad cost rule and the underlying requirements would need to be fulfilled by all European clubs that qualify at the group stages of the UEFA club competitions.

    For this rule to be enforceable, the clubs would need to bear employee benefit costs in excess of EUR 30 mio (conversely, clubs that bear employee benefit costs below EUR 30 mio fall outside the scope of the squad cost rule).

    The costs in association to squad wages, transfer indemnities as well as ensuing agents’ commissions will gradually be capped at 70% of the clubs’ total revenue as of the 2005/2006 licence season (90% and 80% of the clubs’ total revenue in the licence season 2023/2024 and in the licence season 2025/2026, respectively). In other words, in a bid to curb the inflation that comes with the foregoing skyrocketing fees, this rule dictates that the clubs’ expenditure should not exceed 70% of their annual revenue, thus, establishing a cap. For the license season 2022/2023, the break-even requirement will still be applicable in lieu of the cost control requirement.

  • Miscellaneous

    Additional clauses require an improvement in the recording of balance sheet items (setting minimum disclosure requirements), the curtailment of the debts payable as well as compliance of the transactions with both related and non-related parties with the fair value.

    As per the definition of fair value enshrined in Annex J.7 UEFA CLFSR, “Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction. An arrangement or a transaction is deemed not to be an arm’s length transaction if it has been entered into on terms more favorable to either party to the arrangement than would have been otherwise obtained.”

    In variance with the UEFA FFP regulations that required solely transactions between related parties to be at arm’s length and thus at fair value, UEFA CLFSR have gone a step further requiring all commercial transactions and player exchange transactions to conform to the fair value.

    In this regard, and in order to closely monitor whether said transactions align with the fair value, independent third-party evaluators will appraise said fair value. UEFA will provide a shortlist of third-party evaluators. From the context of Annex J (i.e., J.8.5) it can be inferred that it would be judicious for the clubs to use the services of, at least, two independent evaluators to obtain an impartial evaluation.

Summary

With the new regulations, UEFA is determined to step up further its efforts to deter football clubs from living beyond their means and to mitigate the financial risks in the pursuit of sporting success. It is to be seen whether these new regulations will establish and safeguard a level playing field among all football clubs partaking in the UEFA club competitions.

Acknowledgements

We thank Panagiotis Roumeliotis and Alina L. Chicherio for their valuable contributions to this article.

About this article

Vassilios Koutsogiannakis
By Vassilios Koutsogiannakis

Senior Manager, Sports Desk Legal Services | EY Switzerland

Dedicated lawyer who enjoys combining his passion for sports with his profession to provide exceptional legal services to his clients.

Related topics Media and entertainment
Upvote