The Financial Conduct Authority's (FCA) Woolard Review

The Financial Conduct Authority’s (FCA) Woolard Review of the unsecured credit market has attracted press attention since it was published in February 2021. Much of the media focus has been on what the report said about the ‘buy now pay later’ market, a market that last year had trebled in size according to the Review. Firms such as Clearpay, Klarna and Laybuy allow customers to buy a product and then pay in 30 days’ time, or spread the cost, usually over a three-month period.

Employer Salary Advance Schemes (ESAS)

However, another aspect of the Review that has attracted far less attention is its analysis of what are known as Employer Salary Advance Schemes (ESAS), which gives employees access to their earned wage before their regular pay day, either directly or through a third party. The report noted that the market for ESAS is: still in its relative infancy. There are a small number of providers who partner with employers, predominantly across the hospitality, retail, and healthcare sectors. Nonetheless, we are seeing new providers joining the market and expect the sector to expand in the next few years.

From a CIPD perspective, we believe that ESAS can be a useful way for employees of dealing with an unexpected financial emergency. ESAS can help individuals avoid having to take out high-cost credit, or asking for emergency financial aid from friends or family, and instead allow employees to cover emergency need from their own earnings. However, while ESAS can also alleviate the symptoms of in-work poverty, the CIPD recognises that they are not designed to address the root causes, such as low pay.

Financial wellbeing strategies

To be truly effective in the workplace, such schemes need to be embedded into a financial wellbeing strategy, which encompasses such elements as a liveable wage, a guarantee of enough hours to receive a liveable income, fair pay, the opportunity to save for the future, benefits that give support during an emergency, the opportunity for career progression, financial education, etc.

Early pay access on its own is not a substitute for a workplace financial wellbeing strategy or a secure and liveable income. However, people professionals should help their employers explore whether paying workers more frequently – such as fortnightly or weekly, or allowing early payment on an ad hoc basis – would help individuals manage their costs more effectively and absorb financial shocks that would otherwise send them into debt. This could be done by asking employees directly for their views, such as through a survey, forum, or their representatives. Indirectly, it could be done by examining the organisation’s people data, such as requests for wage advances, feedback from the employee assistance programme provider, absence levels, etc.

While this move might increase payroll expenditure, it might also reduce the expenses associated with employee financial anxiety, such as reduced productivity. It might also improve perceptions of the employer and product brands among employees, customers, and investors.

If it’s not possible for an organisation to pay its people more frequently, then it should consider allowing them to access their earned pay early in the event of an emergency. The organisation should put safeguards in place to ensure that they do not encourage employees to adopt inappropriate financial habits, such as by limiting the frequency and the amount that can be accessed early, signposting relevant financial information and guidance, paying for financial advice, providing financial awareness courses, etc. People professionals can help encourage take-up of this kind of facility by building cultures of trust, training line managers to support their teams in a non-judgemental way and encouraging more open dialogue about financial worries.

The pros and cons of using ESAS

If employers themselves are unable to offer their employees earned salary access, then providing it through a ESAS provider is an option. If organisations go down this route, then as well as putting in place the safeguards mentioned above, they should also consider:

  • As many ESAS providers will charge for this service, employers should consider contributing to this fee. 
  • Some providers will offer this service for free to employees so long as the organisation pays for some of its other services. However, this ‘freebie’ might not suit the specific needs of staff and it might make sense to go with another provider for early pay day access even though this other provider will charge for it. 
  • Employers should review how ESAS providers would treat those employees who might get in financial difficulty to ensure that they would be dealt with fairly and not marketed alternative credit products that could cause further harm.
  • When looking to partner with a commercial provider, employers should evaluate its fit with both its corporate social responsibility and employee financial wellbeing strategies.
  • As well as exploring the advantages of such an arrangement, organisations should consider the potential risks to the reputation to it employer and customer brands. 

The CIPD's thoughts and recommendations on ESAS

The CIPD supports the call from the Woolard Review that: The FCA working with the government should encourage ESAS providers and major employers to draw up a code of best practice. Where firms are regulated for part of their activity by the FCA, the FCA should look to formally recognise the code. Further, major employers should be encouraged to only contract with ESAS providers adhering to this code.

And further that: ...the market should continue to be monitored and if the position changes, the question of bringing ESAS within the FCA’s remit should be re-considered.

As well as early access, the CIPD recommends employers should explore the steps it can take to help employees better deal with sudden financial emergencies, such as to repair a boiler or car, or the costs associated with an illness or bereavement, etc. One option is to help employees to save for these eventualities, such as through a ‘rainy day’ fund, such as advocated by NEST and credit unions.

Another is to provide insurance that helps employees deal with sudden demands for money. For instance, the organisation could pay for some of these benefits, such as life assurance, while it could offer access to others, such as medical insurance, at a discount.

What employers should do next

The pandemic has highlighted the issue of employee financial wellbeing. It is important that employers recognise the importance of this issue, and that HR can create a strategy that is both aligned and integrated with their organisations’ business and people strategies.

About the author

Charles Cotton, Senior Performance and Reward Adviser

Charles has recently led research into the business case for pensions, how front line managers make and communicate reward decisions, and managing reward risks, as well as the creation of a good practice guide on the annual pay review process. He is also responsible for the CIPD’s public policy work in the area of reward and is a Chartered Fellow of the CIPD.

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