CEO COMMENTARY: Salary Finance- unregulated payday loans in disguise?
Commentary | 21/01/21
Salary finance, or advance, schemes seem to have grown rapidly in recent times. These schemes allow employees to access their salary early on the grounds that this will enable them to better manage their finances. Major employers, along with many well-known hospitality brands, have signed up to a range of salary finance schemes and early access to pay continues to grow in popularity.
These products sit outside of FCA regulation currently, and seemingly trying to avoid future restrictions, many companies that offer early access to pay are keen to point out that it is not ‘credit’.
Salary finance schemes were included within the scope of the recent Woolard Review, most of the attention about unregulated products focused on the ‘buy-now pay-later’ market, a focus reinforced by recent negative media coverage. As we await the Woolard Review’s findings, we believe there is significant risk to consumers from salary finance. Customers who use salary advance schemes need to be protected in a similar way to customers who use consumer credit.
Salary finance providers often position themselves as the cheaper alternative to high-cost credit and claim to focus on the financial wellbeing of employees. In reality, these schemes appear low cost because there is almost no risk of an advance not being repaid.
We have concerns around the potential for customer harm that could come from using these products.
Customers have less protection in comparison to regulated products and carry all the risk. Limited or non-existent affordability checks, and the fact that use of a salary advance is not obvious when regulated lenders check whether a customer can afford a loan creates problems. It means that customers could quickly find themselves overburdened, given credit they cannot afford to repay, in a situation that is very difficult to get out of.
Advances are often repaid via a single payment following the next payday. Unlike regulated lenders, most salary advance schemes do not check whether the employee can afford this without borrowing again. This creates a risk of employees relying on repeated advances to survive and meet their financial commitments. Individuals may also be tempted to borrow more than they can afford to repay and become trapped in a spiral of debt.
For employees who do encounter difficulty, there is no requirement for employers or advance providers to refer individuals for debt advice, or other help, if they are unable to manage their money after using salary advances.
With salary finance, campaigners are advocating for an unregulated product, that avoids affordability checks, does not offer forbearance, or give primacy to priority debts. While there were concerns about payday lenders using continuous payment authority (CPA) to take repayments, this is CPA ‘on steroids’ as the money does not even reach the bank before it is repaid.
It is a retrograde step to replace a regulated product with one that is unregulated.
The current growth of these products outside the regulatory perimeter illustrates the need for the regulatory framework to be able to move quickly, adapting to the way consumers and the market change. We hope the need for greater consumer protection in this space is included in the Woolard Review’s recommendations.
Payday advances are effectively loans against future salary and should be regulated in the same way as credit products.