Employer Salary Advance Schemes (ESAS) are not visible for credit reference agencies (CRA) and can result in unaffordable loans being made, says the Financial Conduct Authority (FCA).
An ESAS, typically run by a specialist scheme operator which is usually unregulated, enables the employee to draw down on wages earned before their next payday. There is often a fee attached to each drawdown.
The FCA is monitoring the ESAS market and is highlighting possible risks to employers and employees, including the lack of visibility for CRAs.
CRAs will not record the use of the product, so creditors who subsequently carry out credit searches won’t necessarily be aware that the customer is using ESAS. This information may be relevant to the creditors’ assessment of affordability risk, and can may result in affordable loans being made.
The FCA is also highlighting the lack of credit regulation. ESAS providers have no obligation to check affordability, so employees will need to satisfy themselves that they will have enough money on payday to pay other expenses they may incur.
The regulator has also stressed the lack of transparency about cost. The amount of the transaction fee might be a modest sum but there is a risk that employees might not appreciate the true cost and how this compares with credit products such as loans, the FCA said.
There is also the risk that 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.
The FCA said employers need to consider matters such as the build-up of charges where the product is used repeatedly and where employees might become dependent on the scheme.
Jason Wassell, chief executive of the Consumer Finance Association (CFA), said: "In many cases, salary advance schemes are not regulated by the FCA, and so customers have less protection and carry all the risk. There are limited or non-existent affordability assessments before advances are given. But that is not the only potential problem. Advances can be the start of a process of repeat lending, the advance is repaid ahead of priority debts, and regulated lenders see none of this when they check credit files.
"We risk forgetting past lessons. In looking for alternatives to the payday product of a decade ago, we are ignoring the progress made in regulating consumer credit. We are at risk of promoting an alternative with many of the features much criticised in the payday product.”