FCA publishes statement on Employer Salary Advance Schemes
10 August 2020
The Financial Conduct Authority (FCA) has published a statement on the topic of Employer Salary Advance Schemes (ESAS), explaining the associated risks and benefits and providing information that both employers and employees should consider when utilising them.
Although ESAS do not fall under the FCA’s regulation, due to the fact that they don’t meet the definition of credit under legislation, the FCA wanted to provide its viewpoint on the schemes, as they share similarities with some other credit products. In fact, ESAS are often advertised as a safer alternative to high cost credit.
ESAS allow employees to access some of their salary prior to their contractual, standard pay date. There is usually a fee associated with this. They are a relatively new development, usually administered by specialist scheme operators and available to both public and private sector employers. The FCA maintains that, when used correctly, ESAS can benefit employees. They can be really helpful for those employees who have to deal with unexpected expenses, or short-term cash flow issues. They are ordinarily cheaper than alternatives such as payday loans.
Salary advances can help those who face short-term cash shortages but it is important to remember that the amount of the advance will be taken from the next payment that an employee receives. Individuals who use salary advances must ensure that they can afford to pay their outgoing and expenses once the advance has been taken. If there are any issues in this happening, then this could suggest that there is an underlying or longer term financial problem, which a salary advance will not be able to solve. Anyone experiencing financial problems should access debt advice. The Money Advice and Pensions Service has helpful information about where employees can get help. Those who are struggling to meet credit commitments, for example, their mortgage, should consider contacting their creditors, who may be able to help by offering options such as repayment plans.
Before offering ESAS to their employees, employers need to think carefully about all of the elements of the scheme, assessing the advantages and any potential risks. They should consider the accumulation of charges that could be imposed where products are used repeatedly, and be mindful of the fact that employees may become dependent on the scheme. ESAS have their limitations, as they only offer short-term relief. ESAS will not serve to fix an employee’s wider financial problems, so employers should think about advising employees to seek debt advice, directing them to places that provide free advice. ESAS operates outside of credit regulation ordinarily but there are different ways in which the scheme could be structured. Employers should consider seeking professional advice to establish whether the ESAS being provided to employees involves the carrying out of regulated activities.
Specialist scheme operators are often the providers of ESAS, and offer them as part of a ‘wellbeing package’, aimed to assist employees with managing their finances. The scheme may be offered in an app format which links the employer’s payroll operations to the employee’s bank account. Employees usually then have the option to withdraw up to half of their earned wages prior to the next pay day. The scheme operators will normally charge the employee a fee per withdrawal. Employers will then pay the remainder of the salary, after the advanced payments have been deducted, on the next pay date. Employees have the ability to make numerous drawdowns each pay cycle, and to repeat the process in later periods.
Employers need to consider the potential risks, both for themselves, and for employees, in the following areas:
- Lack of credit regulation – ESAS usually operate outside of credit regulation, meaning that the regulatory and statutory rights and protections which benefit borrowers under customer credit arrangements, do not apply. The high-cost short-term credit price cap on charges does not apply either, meaning that the Financial Ombudsman Service can not consider complaints
- Lack of transparency about cost – It may be the case that the transaction fees are relatively low, however employees may not understand how this compares to credit products such as loans. It could be difficult to establish how reasonable the fixed transaction free is in relation to an interest rate / APR. It could be that the fees are higher than the price cap for payday loans and other forms of high-cost short-term credit, dependent on the amount of the fee, and the frequency at which the scheme is used
- Dependency and repeat use – If employees withdraw their salary early, it is highly plausible that they will struggle towards the end of the next payday, creating a cycle of repeat advances and spiralling fees
- Lack of visibility for credit reference agencies – Credit reference agencies will not record use of the product, so any creditors who run credit searches will not always be aware of the fact that the customer is using ESAS
If employees do not have major debt problems, then it may be the case that an ESAS would be really beneficial for them. Some scheme operators are also developing models where the employee pays no fees but the burden falls on the employer, who bears the full cost.
Employees who have limited options are more at risk. The FCA has provided a number of recommendations for employers and scheme operators which could reduce those risks, including:
- Scheme operators could consider advising employees about the best places to seek financial help from on the employee section of their website, or within the app, if they provide one
- When introducing employees to ESAS, employers could ensure that they highlight the limitations of salary advances and potentially signpost them to the Money Advice Service website, if employees require debt advice. They may also inform employees about debt charities, including Citizens Advice and Stepchange – this may be particularly relevant where those who are using the scheme frequently are identified
- Periodic notifications could be provided to employees where transaction charges are building
- Scheme providers could develop systems that monitor the pattern of usage of employees, and where the usage is substantial, alerts could be triggered providing guidance and directing employees to organisations providing free debt advice
The FCA will continue to monitor the ESAS market, and has increased contact with firms who offer alternatives to high cost credit.
Do you have any questions, comments, or concerns surrounding Employer Salary Advance Schemes? The CIPP’s Policy and Research team would really appreciate any feedback on the topic, so please get in touch and email Policy@cipp.org.uk.
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