UEFA’s new Cost Control Rule: a Salary Cap in all but name?
Introduction
Following our earlier posts on Stability and Solvency requirements, we complete our blog series on UEFA’s new monitoring requirements with an explainer of the Cost Control rule. Unlike the Stability and Solvency rules, the Cost Control rule does not have a predecessor in the FFP regulations. It has been introduced for the first time with the new UEFA Club Licensing and Financial Sustainability Regulations (FSR).
The Cost Control rule is expected to mark a step-change in UEFA’s approach. The underlying squad cost ratio metric is a variation of a salary cap, while the corresponding sanction is the so-called ‘luxury tax’. How exactly these concepts operate is explained below.
Scope of application
The Cost Control rule applies to all football clubs that qualify for the group stages of the UEFA Champions League, the UEFA Europa League or the Europa Conference League. Article 79.05 FSR provides for one exception – the Cost Control rule does not apply to clubs with employee benefit expenses below EUR 30 million in the reporting period that ends in the calendar year in which the UEFA club competitions commence and the reporting period immediately prior to that.
The EUR 30 million threshold refers to the aggregated employee benefit expenses in the two reporting periods. Such interpretation can be inferred from the language which UEFA uses in Article 79.04 FSR, which specifies that the Stability requirements will be applicable to clubs which exceed the relevant threshold in ‘each’ of the two reporting periods. The threshold for the Cost Control requirement is formulated in a different way which implies that the employee benefit expenses for the two relevant reporting periods are aggregated for the test.
Squad Cost Ratio
The relevant metric for the Cost Control rule is the squad cost ratio of the club. This ratio should not exceed 70% and is calculated as the proportion of:
(i) employee benefit expenses, amortisation/impairment of player (or head coach) registration costs and agents and intermediaries’ costs (the numerator); from
(ii) adjusted operating revenue and net profit/loss on disposal of player (or head coach) registration and other transfer income/expenses (the denominator).
Each of the elements of the squad cost ratio are comprehensively described in Annex K of the FSR.
Put simply, the salary spending of the club should correspond to a percentage of what it earns from football activities. For example, if the club’s relevant earnings (as referred to in paragraph (ii) above) are EUR 200m, then the club’s cap for the expenses referred to in paragraph (i) above would be EUR 140m (calculated as 140/200 = 0.7 or 70%).
Relevant Period for Calculation
The relevant period for the calculation of the squad cost ratio is the calendar year ending on 31 December during the licence season for each item referred to in (i) and (ii) above, except for the net profit/loss on disposal of player (or head coach) registrations and other transfer income/expenses, which is calculated as the 12-month average of the last three calendar years to 31 December during the licence season.
Sanctions
The squad cost ratio of the club should not be greater than 70% for the license season and pursuant to Article 96.04 of the FSR a breach of that rule will lead to a financial disciplinary measure. In case of a significant breach (as defined in Annex L of the FSR) additional disciplinary measures are imposed based on the principles set out in Annex L of the FSR. The financial disciplinary measure is calculated as a proportion of the squad cost ratio excess. Previous breaches and the percentage points above the defined limit are also taken into account when setting the fine.
To illustrate how it works, let us take again the above example where the club’s relevant earnings amount to EUR 200m and its cap is EUR 140m. If the club has spent EUR 164m on salaries and agent fees, then its squad cost ratio would be 82% (calculated as 164/200 = 0.82 or 82%). That means EUR 24m or 12% in excess of the defined limit, in which case the second row of the grid below applies (i.e. between 10 and 20 percentage points above the defined limit). If the club is in breach of the Cost Control requirement for a first time, the fine will be between 25% and 50% of EUR 24m (i.e. the amount in excess). If, however, this is not a first offence, the fine will be between 50% and 75% of the amount in excess for the second breach and between 75% and 100% of the amount in excess for the third breach.
|
Squad cost ratio % points above define limit |
First time in breach | Second time in breach | Third time in breach | Fourth time in breach |
| >0 - ≤ 10 | 10% - 25% | 25% - 50% | 50% - 75% | 75% - 100% |
|
>10 - ≤ 20 |
25% - 50% | 50% - 75% | 75% - 100% | |
| >20 - ≤ 30 | 50% - 75% | 75% - 100% | ||
| >30 | 75% - 100% |
Transitional Provisions
The Cost Control requirements will not apply in the 2022/23 season but will come into force only gradually:
- The squad cost ratio of the club should not exceed (i) 90% in the 2023/24 season and (ii) 80% in the 2024/25 season.
- The net profit/loss on disposal of player (or head coach) registration and other transfer income/expenses is calculated: (i) in 2023/24 for either one, two or three calendar years; and (ii) in 2024/25 for either two or three calendar years to 31 December during the licence season and then pro-rated to 12 months, at the discretion of the club.
Comment
The Cost Control requirement is – in effect – the introduction of the long-debated salary cap in European football. The aim of the rule is to halt the negative trend of the careless spending on wages which the FFP regulations couldn’t combat. The rule appears particularly strict and the breach of it inevitably leads to financial penalties, the amount of which is linked to the significance of the breach. Football clubs across Europe will need to take extra precaution with their salary expenses and maintain strict financial discipline.
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