Analysis of UEFA's Financial Sustainability Regulation
Six weeks ago, I attended the Financial Times’ Football Business Summit, where I asked UEFA’s President, Aleksander Čeferin, if an update to the existing Financial Fair Play regulation (FFP) would incorporate further measures to improve the industry’s sustainability (here is a link though it is behind a paywall). Mr Čeferin answered without giving much away, saying UEFA was reviewing the existing regulation to decide what works and what additions would strengthen European clubs’ finances. On 7th April 2022, UEFA announced it had approved the Club Licensing and Financial Sustainability Regulation (FSR) to replace the FFP introduced in 2011. UEFA’s President stated that FFP had “served its purpose”, and that the FSR is designed to address new challenges in European football. This article will provide my initial assessment of the FSR and look at the top six EPL clubs’ positions in light of FSR. Let’s dive in.
FSR and FFP: What is the difference?
The Break-even requirement (BER), the foundation of FFP, stipulated that clubs’ relevant expenses should not exceed relevant income by more than €5m (acceptable deviation) over three years (further explanation here). UEFA allowed a leeway of up to €30m from the €5m threshold, provided it was covered by contributions from equity participants/owners. The FSR contains BER, but it is now referred to as the football earnings rule within the stability requirements of FSR. The significant difference is that UEFA has increased the maximum acceptable deviation above the €5m threshold to €60m and, under certain circumstances, €70m. The football earnings rule will come into full force by 2024/2025 – with 2023/2024 and 2024/2025 as transitional seasons.
The hallmark of the FSR is the cost control requirement that introduces the concept of Squad Cost Ratio (SCR), which comes into force for the 2023/2024 season. The numerator for the SCR is the sum of the wages and amortisation/impairment of the cost (transfer fees, agent fees etc.) of acquiring relevant persons, that is, players and the head coach. The denominator for the SCR is the sum of commercial, matchday and broadcast revenue, other operating income, and twelve months’ prorated net profit or loss from the sales of players for the preceding thirty-six months. The denominator is reduced by adjustments to revenue above fair value, exceptional income, and non-football related income. For a given season/year, SCR would be the SCR numerator (expenses) divided by the SCR denominator (income). The SCR threshold per season is 70%, but for the first two seasons, 2023/2024 and 2024/2025, the thresholds will be 90% and 80%, respectively.
The primary sanction for exceeding the SCR thresholds will be financial. However, depending on the significance of the breach, UEFA can impose additional sanctions. The former is calculated as a proportion of the club’s SCR numerator (expenses) above the amount that would have allowed the club to be within the threshold. UEFA’s disciplinary body would determine the exact proportion based on the severity of a club’s breach (see Figure 1) and the trend of non-compliance.
For example, if a club’s SCR is 75% with €75m as the numerator and €100m as the denominator, the fine will be based on €5m which is the excess on the 70% threshold. Based on the above, the objective of the SCR is straightforward, cost control. UEFA seeks to further guide clubs towards a more sustainability-focused financial management of football-related activities.
This is not exhaustive of the FSR as it was just released five days ago, and it is a robust document. However, the above is an initial highlight of significant amendments.
Top-6 EPL clubs and the SCR
Given that the SCR is novel, I would be focusing on it in the analysis of the EPL’s top-6 clubs’ position in light of the FSR. It is important to note here that while the following analysis is a close guide to what the clubs’ SCR would have been for the 2021 financial year, there are limitations to my calculation because 1) the wages in the financial statement are for football and non-football staff 2) adjustments to the denominator are not detailed in clubs’ financial statements and 3) matchday revenue in 2021 was almost non-existent because of the pandemic. For the last point, I have calculated and used the clubs’ five-year (2015-2019) average for 2021’s matchday revenue.
Based on UEFA’s definition of SCR, the information in the clubs’ financial statements and the limitations mentioned above, figure 2 shows my calculated SCR for the top six EPL clubs. Assuming 2021 was the first year of implementation of the SCR, none of the top-6 clubs would have exceeded the 90% threshold. However, Chelsea would have exceeded the second-year threshold of 80%. Only Tottenham and Liverpool would have escaped exceeding the 70% threshold for the third year.
Figure 3 shows the makeup of the clubs’ SCR denominator. Manchester City’s £671m denominator would be the highest while Tottenham’s £429m would be the lowest. Chelsea’s (prorated) player sales profit of £77m is the highest, while Tottenham’s £15m is again the lowest of the top six clubs. Manchester City’s broadcast and commercial revenue of £298m and £272m are the highest while Arsenal’s £184m and £136m are the lowest, respectively. Liverpool would lead the matchday revenue with £121m while Manchester City’s £52m is the lowest average.
Manchester City is ranked first for the SCR numerator and its makeup (wages and transfer fees), while Tottenham is ranked sixth. Ideally, the lower the cost, the better, but expenditure on the players and coaches in football is highly correlated with on-field success. The key for a club is to balance managing its SCR with its on-field ambitions.
Potential strategies
Liverpool
Liverpool’s 66% SCR is the healthiest of the six clubs, with its wage bill and annual transfer fees the third lowest. The club is enjoying its best on-field performances – consistently qualifying for the UCL and winning trophies – in decades, a huge contributing factor to its impressive financial performance. Asides from maintaining the status quo on-field, there is room for Liverpool to grow its commercial revenue and improve on the profit it makes from the sales of players.
Tottenham
Tottenham has not qualified for the UCL in the past two seasons; therefore, finishing in the top four would help the club improve on its 67% SCR. Tottenham’s new stadium – benefiting from its first full season with fans- and the increased commercial activity around the stadium would be integral in growing the club’s revenue. The club’s profit from the sales of players is the lowest of the six clubs, another avenue, if improved, that could bolster the club’s SCR. The club’s wage bill and annual transfers fee is the lowest in the top six, giving the club wiggle room to incentivise players with performance-related bonuses.
Manchester United
Manchester United’s lack of progress in the UCL, recent trophy drought and substantial investments in its playing squad has culminated in an SCR of 73%. While the club’s commercial activities and the 76,000 seater Old Trafford stadium have aided satisfactory financial performance, on-field success will help the club achieve a better SCR. Also, the club would benefit from negotiating better deals for the sales of its players to earn more profit. The club would need to keep an eye on its wage bill.
Manchester City
Like Liverpool, Manchester City has been successful on-field, winning trophies consistently. Besides maintaining the performances on the pitch and sales of players, Manchester City’s matchday revenue which is the lowest of the top six clubs, can be improved. That would require increasing ticket prices, which most clubs tend to avoid. Another way the club can improve its 77% SCR is to reduce its wage bill and its investment in acquiring players. However, this might negatively impact its on-field performances.
Arsenal
Missing out on UCL (five years in a row) and UEL qualification (in the 2021/2022 season) amidst significant investment in transfers fees has put Arsenal’s SCR at 83%, the second-worst in the EPL top six. By finishing in the top four and qualifying for the UCL, Arsenal can improve its SCR because of its stadium size and fanbase. Arsenal can grow its commercial revenue, currently the lowest, by enhancing its commercial activities. Also, Arsenal can improve its SCR by improving its management of players’ contracts and negotiating better deals when it eventually sells them.
Chelsea
Chelsea’s 87% SCR is the highest of the top six clubs. The club’s SCR denominator is ranked fourth while its SCR numerator is the second-highest, implying that the club’s high expenditure on players is primarily responsible for its SCR position. Chelsea can improve its SCR by enhancing its commercial focus and increasing the capacity of its stadium, which is currently the lowest of the top six clubs. At £77m, Chelsea has earned the most from the sales of players, and this is a strategy that the club should maintain while improving other sources of revenue.
Conclusion
UEFA’s FFP improved the profitability of European clubs before the pandemic struck in 2020. The introduction of the FSR is UEFA’s response to the rising costs of wages and transfer fees. Would the SCR lead to reduced costs, encourage clubs to grow their revenue or both? Time will tell. Nevertheless, I believe the SCR would help encourage clubs to live within their means, manage their financial performance and attain sustainability.
The impact of the SCR on individual clubs would vary depending on their size and business models. Based on my analysis, I believe most of the top six EPL clubs can stay within the acceptable threshold in the first few years of the SCR. However, as with other clubs around Europe, they will need to keep sustainability in view when making football-related decisions. A host of strategies – including those mentioned in this article- can be tailored to fit a club’s immediate needs and future ambitions.