The Financial Conduct Authority has made a statement ‘the risks and benefits of Employer Salary Advance Schemes (ESAS) and what employers and employees should consider when using them’.
Promoted as an alternative to high cost credit they have broadly similar economic effect. Most schemes do not fall under the FCA regulation, as they do not meet the definition of credit under legislation.
ESAS allow employees to access, usually for a fee, some of their salary before their regular payday. They can be a convenient way for employees to deal with unforeseen expenses and occasional short-term cash flow.
The FCA does not usually regulate ESAS as an early advance of salary provided by an employer does not involve the provision of credit, but they can raise similar issues.
What employers need to consider
The FCA state employers should consider all aspects, the advantages and the potential risks. This includes ‘the build up of charges where the product is used repeatedly where employees might become dependent on the Scheme’. ‘The product will not itself resolve an employee’s wider financial problems. Employers may want to suggest that employees can seek debt or more holistic financial advice, and signpost employees to sources of free advice’.
How ESAS typically work
Specialist scheme operators (usually unregulated businesses), often provide the product as part of a ‘wellbeing package’ to help employees with financial management. Some offer employees an app based platform which sits between the employer’s payroll operations and the employee’s bank account. The employee can then a draw down usually up to half of their accrued or earned wages before their next pay day.
The operators usually charge a fee for each drawdown. The employer will then pay the balance of the salary (ie net of the advanced payments and the fees for the service) on the next payday. Employees can make multiple drawdowns during each pay cycle.
The risks for employees and employers
The FCA point out that ‘While the product has benefits, it is important that employees and employers are aware that there may be some risks’.
- Lack of credit regulation – the Financial Ombudsman Service will not be able to consider complaints.
- Lack of transparency about cost.
- Dependency and repeat use.
- Lack of visibility for credit reference agencies.
To see the full statement: