Employer salary advance schemes (ESAS) are becoming increasingly popular in the payments sector. Much of the public focus of the review carried out by Christopher Woolard published on 2 February 2021 (the Woolard Review) was on buy now pay later (BNPL) products but the review also discusses the benefits and the increased risk that comes with offering ESAS and warns the Financial Conduct Authority (FCA) that closer monitoring of these types of payment arrangements is required.

What are ESAS?

The Woolard Review set out the scope of ESAS as an arrangement that allow employees to access a percentage of their monthly pay in advance of their payday. This allows for a split income throughout the month and provides more flexibility for consumers.

The Woolard Review found that certain specialist providers are currently partnering with large company employers, mainly in the retail and hospitality sectors, in order to provide this form of payment arrangement to individuals. It is for the employer to decide what percentage of an employee's salary can be used as part of an advance for the payment. A provider will also usually charge the employee a fixed fee per withdrawal for using this service.

Why is there a risk?

Although ESAS are not as frequently used as, for example, BNPL products, the Woolard Review identified certain shortfalls of this type of payment arrangement which needed to be addressed by the industry:

  • Whose responsibility? There is still a lack of clarity regarding who is responsible for ensuring that employees using these schemes are in the appropriate financial position to do so. Greater transparency is needed between providers and employers on whose responsibility it is to identify and support those employees who may experience further financial hardship by utilising such schemes.

  • Conflict of interest - some providers that offer ESAS also offer other regulated forms of credit. There is a risk that such credit providers may benefit if an employee overuses an ESAS and must therefore use one of the other high cost credit products offered by the provider to cover any salary shortfall.

  • Inaccurate affordability checks - as ESAS are not technically a form of credit service, ESAS providers are not required to report on the usage to the credit reference agencies (CRAs). This means that when regulated credit providers run the required affordability checks, they are unable to see that a possible consumer has already spent part of his or her salary in advance, and that this may affect the consumer's ability to pay off their relevant credit fees that month.

  • Lock in of employers - some providers are offering ESAS for free for both employers and employees, on the basis that the employer contracts to other financial products from the providers. There is a risk that such employers may be 'locked in' to offering ESAS to employees where it is inappropriate to do so.

  • Fees build up- most providers will charge employees a small fixed fee per withdrawal of the advance salary. Although individually this is a minor fee, there is a risk that employees who use ESAS often do not appreciate that the accumulation of such fixed fees will be equivalent to, if not greater than, the interest rates paid on other high cost credit products.

Proposals

Unlike the Woolard Review’s proposal that BNPL products should be FCA regulated (read here for more information), the Woolard Review states that there is not yet a need for the FCA to regulate ESAS. Closer monitoring of such payment arrangements should however be implemented by the FCA.

The Woolard Review further proposes to the FCA that ESAS providers and the major employers using these services should 'draw up a code of best practice' and major employers should only contract with providers following such high standards of practice.

Firms offering such forms of payment should therefore ensure that their digital platforms are built to encourage responsible financial decision making, which should include increased transparency on fees.

Should you have any questions about the above, please do not hesitate to contact one of the members of the Bird & Bird global payments team. 

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