The Financial Conduct Authority (FCA) has published its eagerly anticipated review of change and innovation in the unsecured credit market, written by Christopher Woolard, CBE.
Although fastP.A.Y.E doesn’t offer unsecured credit, the report covers some of our activities relating to Employer Salary Advance Schemes (ESAS). Often referred to as “on-demand pay” and “salary advance” apps.
The report recommends that ESAS providers develop a code of conduct to protect the wellbeing of employees at all times. fastP.A.Y.E welcomes this recommendation and goes one step further by proposing the criteria for a code of best practice outlined in this press release.
The Woolard report covers ESAS because several providers in the market space are offering credit, often unsecured, save for an agreement with the employer to recover the loan from the next paycheck.
The report recognises the benefits of ESAS or On-Demand pay schemes; these include:
Employees may use ESAS to even out their salaries over the month, making it easier to handle daily monthly spending and deal with unforeseen expenditures or emergency payments.
ESAS can be a low-cost, easy-to-access option for people who can’t get loans from traditional lenders, depending on how they’re used. Since automatic withdrawals are withdrawn as part of the payroll process at the end of each month using an ESAS, there is no need to refund anything from the monthly paycheck.
Employers increasingly include goods and services that improve financial wellbeing in their compensation packages, and ESAS are part of that trend.
Some providers and employers are implementing incentives to allow workers to save and gain financial knowledge. Certain providers focus on educating users and assisting them in avoiding chronic and long-term debt; others include referrals to debt counseling organisations.
Several providers have incorporated it into an employer’s payroll system. Over time allow those who take an advance to work additional hours to preserve workers’ final monthly take-home pay.
The study does, however, point out certain possible dangers, and we have responded accordingly.
Tackling end of month shortfall
Respondents to the Woolard report expressed concern that using ESAS could result in a month-end shortfall. As a result, customers can continue to draw down against their salary, incurring increasing charges or resorting to mainstream or potentially high-cost credit to ‘bridge the gap.’
The Woolard report recommends that ESAS providers and employers must keep a close eye on users and engage with workers who appear to be in financial distress. fastP.A.Y.E supports this recommendation and already gives employers the ability to limit the number of withdrawals and set up interventions such as debt advice referrals, support in claiming benefits, and opportunities to work more hours for employees who become regular users.
Expensive fixed fees for regular users
According to information provided in the study, ESAS is used about 1-3 times per month, with use usually spread out over the month. Despite the low frequency of withdrawals, respondents expressed concern about fee pricing, and complete transparency is a vital part of any arrangement.
Many people were worried that customers wouldn’t have enough information to compare ESAS to other credit options, causing them to miss out on cheaper alternatives. Therefore the Woolard report recommends users should be given access to comparison tools. At fastP.A.Y.E we again agree with this recommendation and our service does not charge people on minimum wage and encourages employers to pay all fees.
ESAS providers who also offer regulated credit
It is also essential that where ESAS providers offer regulated credit products or act as a broker, interest conflicts are highlighted.
Suppose unregulated use of an ESAS product creates a need for credit – for example, to cover an end-of-month wages shortfall. In that case, the provider could offer alternative credit products and benefit as a result.
The Woolard report recommends that ESAS providers should always ensure the design of their digital platforms encourages responsible use and does not drive employees to use other credit products offered by the provider. fastP.A.Y.E agrees with the recommendation and does not offer any other credit service to employees.
Interplay with credit providers
Since ESAS providers do not disclose usage to credit reference agencies (CRAs), credit providers are unable to accept usage as part of their affordability evaluation due to the lack of visibility.
Although using an ESAS product does not affect an employee’s monthly pay, it is also crucial to a lender’s evaluation to ensure that any credit extended to a borrower is affordable.
The Woolard report recommends consideration of an employee’s withdrawal of any paycheck before payday, as well as a history of ESAS use that suggests an employee may be in financial trouble, can both play a role in determining whether or not additional credit is granted. fastP.A.Y.E is investigating how the supply of data to CRAs can be used to improve an employee’s credit score, after all, on many occasions, they are using a form of credit and repaying it in a very short time.
Potential connection with other commercial services regulated
Some companies in this sector provide the ESAS service for free or reduced cost to the employer or employee. However, to do so, the employer would need to use other commercial facilities, such as factoring invoices.
Employers should undertake precautions to ensure that their employees are not locked into a service that could have less value in the future. fastP.A.Y.E offers the service as part of an employee incentive and initiative for both the employer and employee, without additional commercial services.
The Woolard recommendation on ESAS
The Woolard report agrees that ESAS are positive, forward-thinking products and says so in the following statement – “Employer Salary Advance Schemes (ESAS) offer a low-cost alternative to using credit like payday loans or overdrafts. If used appropriately, they can give employees benefits and greater control of their finances”.
Woolard says broader regulation may not be required right away, and the FCA should take a proportionate approach and closely track market developments to mitigate individual risks.
Instead, the Woolard report recommends that ESAS suppliers and large firms must be encouraged to develop a code of best practice by The Government and the FCA. The FCA should look to formally recognise best practices where the FCA supervises businesses for part of their activity.
Employers should be encouraged to partner with suppliers who follow the standards of the code of conduct for the sake of consistency and transparency.
With this in mind, fastP.A.Y.E would like to be the first ESAS provider to propose a code of best practice which meets the recommendations of the Woolard report. We hope our fellow suppliers take this in the spirit it is meant and build on our proposals.
Proposed Code of Best Practice
fastP.A.Y.E is fully supportive of the findings and recommendations of the Woolard report and proposes that ESAS suppliers should:
- Pledge to protect the wellbeing of employees at all times.
- Pledge not to use on-demand pay as a way of finding vulnerable individuals to target with other products.
- Providers should not charge a transaction fee to employees on the national minimum wage.
- Refer repeat users to suitable sources for advice.
- Provide customers with tools to help them manage their money.
- Give employers control over the key criteria for an advance of pay, including how much and how often employees can use the service.
- Give employers control overall marketing and contact with the employee regarding the service.
- Don’t force all employees to register.
- Report usage to Credit reference agencies in a way that builds customers credit scores.
We welcome suggestions on the code of conduct from regulators, debt charities and other ESAS providers.