For an increasing number of cash-strapped Scots, a fairly new solution to short term money problems has emerged in the shape of Employer Salary Advance Schemes (ESAS).
Companies such as Hastee and Wagestream have emerged as the leading providers of Employer Salary Advance Schemes, a new form of Payday Loan, albeit without the infamously high interest rates that their predecessors had, that can allow individuals to access up to 50 percent of their wages before their usual payday.
While it is highly unlikely that an individual may have built up problem debt exclusively with an ESAS, they’re more likely to become an issue for people already experiencing financial difficulties.
The main concern with the ESAS is that, if used regularly, the fees can add up to a significant amount.
Despite these fees often being between 0-5% of the loan provided, over time this can accumulate rapidly.
Therefore, without realising, ESAS borrowers can be paying hundreds of pounds in fees if they use ESAS multiple times.
Another concern area with ESAS is the potential for its borrowers to become reliant on the service. If used continuously throughout the year or even over a few months, ESAS can cause budgeting to become focused on two payments a month instead of one. E.g. having to borrow early in the following month as their ‘final salary’ has been reduced by repaying the previous loans.
As a result, anyone considering borrowing through their employer’s ESAS system should be careful about how often they are using them to get through periods of financial difficulties.
Can Employer Salary Advance Schemes result in an unaffordable debt problem?
In short, yes, Employer Salary Advance Schemes can become part of an eventual unaffordable debt problem for people who have been given access to funds but not correctly assessed for affordability.
In a similar way to the likes of payday loans previously, An ESAS can push people with unaffordable debt into a problem debt cycle.
It is therefore anticipated that these Employer Salary Advance Scheme services will be regulated, like the payday lenders they aimed to replace, or more recently like Buy Now, Pay Later lenders such as Klarna and ClearPay.
Whilst still in their infancy, ESAS lenders predominantly work with hospitality, retail and healthcare employers. The FCA said that they are seeing new providers joining the market and expect the sector to expand in the next few years.
In July 2020, the FCA issued a statement that warned of a lack of transparency around costs, and the likelihood of workers making repeat withdrawals and becoming dependent on the services to make ends meet.
The Financial Conduct Authority said that while ESAS products do have benefits, it is important that employees and employers are aware that there may be some risks in using ESAS lending services that could result in Employer Salary Advance Scheme debt issues further down the line.
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 normal 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.
In February 2021, the FCA followed up on the regulation of ESAS loans and highlighted a couple of examples:
Paul, an ESAS user that spoke to the FCA said “I would like to keep it personal and my employer not to know. It could affect your progression.”
Emily, who also spoke to the FCA, but who isn’t a current ESAS borrower said: “I wouldn’t really want my employers to know that I’m struggling with money every month.”
The FCA further warned that “Where ESAS providers also offer regulated credit products or at least act as a broker, there is a potential conflict of interest. If poor use of an ESAS creates a need for credit, for example, to cover a shortfall in wages at the end of the month, the provider could profit from this if they offer alternative credit products.
However, given the size and scale of the market, it would be disproportionate, at this time, to introduce a bespoke regulatory regime. Unlike BNPL (Buy Now, Pay Later), ESAS is not a form of credit relying on a legal exemption, and would therefore require a significant regulatory change to be brought within the perimeter.
Although the review has identified a number of risks of harm associated with the use of these products, the Review hasn’t seen evidence of crystallisation or widespread consumer detriment. Nonetheless, the market should continue to be monitored and if the position changes, the question of bringing ESAS within the FCA’s remit should be reconsidered.”
In their defence, Wagestream claimed that “data clearly shows employees use Wagestream responsibly – with 93% of employees accessing less than 30% of their available wages – as it is their hard-earned money they are spending on emergency expenses, not falling into a cycle of credit and debt.”
Hastee told the Guardian newspaper last year that “Safety and governance are baked in with wellbeing algorithms monitoring a user’s shifts, earnings, deduction frequency, deduction amount, and the type of spending, others in the industry may be regulated because they provide some sort of consumer credit, or control payroll, which Hastee does not.” Hastee also advised that any “unusual behaviour” will mean users are directed towards charities like the Money Advice Service.
Speaking on improved regulation of the Employer Salary Advance Scheme borrowing, Trust Deed Scotland said:
“These schemes can help employees deal with unforeseen expenses and occasional short-term cashflow when used in the right way.
However, we’re pleased that the FCA has committed to investigating ESAS products in the same way that they’re currently exploring the lack of regulation around Buy Now, Pay Later products.
Like guarantor loans before them and BNPL products more recently, there are of course many thousands of people who use these products on a regular basis without falling into a debt trap, however, there are also many thousands who have developed problem debt as a result of those products not being correctly assessed for affordability.
And, we must also stress that there is currently no alarming trend with Employer Salary Advance Schemes developing into unaffordable debt.
We welcome any opportunity for these services to be regulated fairly by the FCA before any such Employer Salary Advance Scheme debt problem can be allowed to happen.”
The demise of Payday Loans?
Payday loans have become significantly more regulated than they were since they first started to appear in the mid-noughties.
Arguably the most famous rise and collapse of a payday lender was that of Wonga.com, created in 2006 by co-founded by South African tech entrepreneurs Errol Damelin and Jonty Hurwitz.
Before going into administration, Wonga, once boasted of being able to get cash into a borrowers account within 15 minutes. However, this was often with little or no affordability checks being put in place.
With many thousands of customers forced into taking on unaffordable debts. Wonga.com collapsed in 2018 with administrators for the lender revealing that as of 2020, that 389,621 eligible claims had been made since Wonga’s demise.
The average debt owed to a payday loan in their peak of 2013 was £1,657 according to the Debt Charity Stepchange.
However, many other payday loans companies do remain open and operate in Scotland, including Lending Stream. Mr Lender and Satsuma Loans among others.
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