ESAS are commonly promoted as an alternative to high cost credit and have a broadly similar economic effect. While most of these schemes do not fall under the FCA’s regulation, as they do not meet the definition of credit under legislation, given the similarities with some credit products we thought it may be helpful to set out our views to help employers, employees and scheme providers to make informed decisions.
What ESAS offer
ESAS allow employees to access, usually for a fee, some of their salary before their regular payday. These schemes are a recent development, and are usually administered by specialist scheme operators who promote the scheme to a variety of both public and private sector employers.
When used in the right way, ESAS can help employees. They can be a convenient way for employees to deal with unforeseen expenses and occasional short-term cash flow. They are often promoted as a cheaper alternative to high-cost credit such as payday loans. 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 employees need to consider
A salary advance can help those who face cash shortages during the month and do not have enough money to get through to payday. It can be a quick and simple way of accessing immediate cash. However, people should bear in mind that the amount they were advanced and any fees will be taken from their next pay cheque. So they need to be sure they can meet their outgoings and pay any expenses that might then arise. If there are difficulties doing this, then this might indicate a more underlying or longer term financial problem and a salary advance might only partially help those in this situation.
Those with financial problems should consider getting debt advice. The Money Advice and Pensions Service has useful information for employees and provides details of where you can get help. Anyone having difficulty meeting their existing mortgage or credit commitments, should also contact their creditors who may be able to offer options such as agreeing repayment plans.
Our website gives information about available support for those financially affected by coronavirus.
What employers need to consider
Employers should consider all aspects of the scheme, the advantages and the potential risks, when offering ESAS to their employees. This includes matters such as the build up of charges where the product is used repeatedly where employees might become dependent on the scheme.
Employers should consider the limitations of ESAS, such as the short-term nature of the relief. 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.
Although ESAS will usually operate outside of credit regulation, there are a variety of ways the schemes could be structured. Employers should give careful consideration as to whether the ESAS being provided to employees involve the carrying out of regulated activities and if necessary seek professional advice.
How ESAS typically work
Specialist scheme operators, which are 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 scheme operators usually charge the employee 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 and can repeat this again in subsequent periods.
The risks for employees and employers
While the product has benefits, it is important that employees and employers are aware that there may be some risks in using these schemes.
- Lack of credit regulation. The regulatory and statutory rights and protections, from which borrowers under consumer credit agreements benefit, do not apply, as ESAS usually operate outside of credit regulation. For example, ESAS providers have no obligation to check affordability. Therefore, employees will need to satisfy themselves that they will have enough money on payday to pay other expenses they may incur at that time (for example their mortgage or rent payments), when they receive the balance of their salary. The high-cost short-term credit (HCSTC) price cap on charges does not apply either, and the Financial Ombudsman Service will not be able to consider complaints.
- Lack of transparency about cost. The amount of the transaction fee might be a modest sum. However, there is a risk that employees might not appreciate the true cost and how this compares with credit products such as loans. Employees may find it difficult to compare the fixed transaction fee charged for each drawdown to an interest rate/APR. In some cases (depending on the amount of the advance and when it is used in the pay cycle) this may result in it being equivalent to an interest rate that is higher than the price cap for payday loans and other forms of HCSTC. This can become particularly expensive if an employee uses the product repeatedly
- Dependency and repeat use. If an employee takes their salary early, it is more likely they will run short towards the end of the next payday, potentially leading to a cycle of repeat advances and escalating fees.
- Lack of visibility for credit reference agencies. Credit reference agencies will not record use of the product, so creditors who subsequently carry out credit searches won’t necessarily be aware that the customer is using ESAS. This may in some cases be relevant to creditors’ assessment of credit or affordability risk and might result in unaffordable loans being made.
How employers and scheme operators can mitigate some of these risks
For many employees who do not have major debt problems, an ESAS may be helpful where for a variety of reasons they need to quickly access some of their salary early.
We are also aware that some scheme operators are developing a model where the employee pays no fees – the employer bears the full cost.
For employees with limited options, there are potential risks. We set out below ways in which employers and scheme operators could mitigate some of these risks.
- Scheme operators could highlight, on the employee section of their websites or where they provide an app, that where the employee has underlying financial problems that a salary advance may not in itself be sufficient to resolve such issues and suggest that they seek financial help from a debt advice charity.
- Employers, when introducing their staff to such schemes, could similarly highlight the limitations of a salary advance and suggest that if the employee needs debt help or access to more holistic financial advice, they could signpost them to the Money Advice Service website. They could also provide contact details of debt charities, such as Citizens Advice and Stepchange.
- Bringing the above to the attention of employees may be particularly important where the employer and scheme operator become aware that individual employees are drawing down salary under the scheme on a frequent basis.
- Employees could be provided with periodic notifications where there is an accumulation of transaction charges.
- Similarly, scheme providers could develop systems that monitors the pattern of usage of individual employees. Where there is a pattern of repeat use which may be a sign of financial difficulties, then this could trigger alerts that might provide guidance and signpost the employee to organisations that provide free debt advice.
Our ongoing work
We intend to continue to monitor the ESAS market for developments including the emergence of new business models.
Since we started to raise public awareness of the need for increased availability of alternatives to high cost credit, we have had increased contact with firms whose propositions are related to the provision of such alternatives. We welcome these developments.
We encourage innovators and other businesses with innovative ideas that could help increase the availability of alternatives to high cost credit who wish to benefit from Innovate services to contact us at [email protected]