Can I Have a Sub Please Boss?
In this blog post we’ll be looking at the world of salary finance in the UK. Employer Salary Advance Schemes (ESAS) are a relatively new phenomenon in the UK and are being promoted as an alternative to High Cost Short Term credit otherwise known as payday loans. As most of these schemes do not feature any form of credit being issued they largely fall outside the scope of the regulator for all things financial in the UK and that’s the Financial Conduct Authority (FCA).
An ESA is exactly what it says it is, an advance on your next wage. If you work for a small company where the boss is always around and personally knows everybody he or she has taken on, it’s usually no problem for said boss to put their hand in their pocket a week before payday and give a sub to whoever may need it. They’ll probably be happy to do this on a very occasional basis. If you work for a larger company or need an advance more than once then an ESAS may be the answer your firm is looking for.
Enter the Employer Salary Advance Scheme Provider. The scheme providers are usually unregulated companies who provide the product as part of an office ‘wellbeing package’.
The aim being to help employees better manage their money and look after their financial affairs. Some schemes come with an app which sits between a company’s payroll department and the employees’ bank account.
The employee can make multiple withdrawals on their accruing salary usually amounting to up to half the salary in any one month. They can repeat this every pay cycle if needs be and are charged per transaction by the scheme provider. At month end the employer pays the salary as usual minus any deductions for withdrawals and charges accrued.
Issues to Consider
From an employee point of view these schemes can provide much needed relief at a time they need it most. If people can access money quickly and simply via their employer this could negate the need to consider taking an expensive short term loan like a payday loan.
While the main difference here is the lack of interest being charged to the employee there is a danger that if used too frequently, too many transaction charges will be accrued and up to half of a persons’ salary will have gone on the day they get it.
And down that route lies the road to more and more drawdowns and the same never ending merry-go-round of drawdown – debt – salary – drawdown which is so typical of the payday loan cycle. It may be that employers also need to be signposting the road to various debt charities who can better help employees manage their money without the need for any type of relief, debt or advances.
Employers should also consider the build-up of charges their employees pay as well as the aforementioned tendency for people to use the scheme too frequently thereby creating ongoing money shortages from early in the pay cycle.
Risks
As well as dependency and repeat use other risks are lack of regulation which means that providers are not required to check affordability of employees whenever they use the scheme, something the FCA introduced recently to the short term loan market.
There is no price cap on charges as in the High Cost Short Term Loan industry nor can you complain to anyone like the Financial Ombudsman Service. The transaction fee is generally a small fee but used repeatedly over a month it could add up to an equivalently high APR if the product was a loan.
There is also no obligation to report drawdowns to a Credit Reference Agency which means an employee could make a loan application and it won’t be clear to a prospective lender that up to half their salary has already been accounted for by the ESAS. This will obviously spell trouble for the employee further down the line if payments become unmanageable.
Conclusions
Employer Salary Advance Schemes are evidently here to stay and used occasionally provide a clear step away from the high APRs of payday loan companies using High Cost Short Term Credit.
The main drawback would appear to be the familiar issue of overuse creating costly transaction fees comparable to high rates of interest but it is obvious that used sparingly from time to time these are an excellent way of accessing money when it’s needed most.
If an employer can see they have an employee or employees who are using the scheme frequently and are regularly having half their wages taken on payday then they should be giving their staff money management guidance and the best place to get this information is from the many debt charities both private and government funded.
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