Does your business provide payment services or e-money solutions to UK customers? If so, you should be aware of the regulations that apply should you appoint a third party to help you. Alternatively, you may be a company that acts as a payment service provider, in which case you should know the rules.
This article provides an overview of the regulations that apply, the differences between a third party acting as an agent or a distributor and what this means in practice for your business.
Our financial services solicitors have extensive experience dealing with e-money and payment services regulations in the UK and can provide further advice or support to help you understand how these regulations may affect your business.
Contents:
Regulatory framework and FCA oversight
Due to the stringent regulatory environment in the UK, payment service providers must maintain rigorous compliance with UK Payment Regulations.
The main regulator is the Financial Conduct Authority (FCA) which provides detailed rules for Payment Service Providers (PSPs) such as authorised payment institutions (APIs), E-money institutions (EMIs), banks and credit card providers. Businesses that provide in-scope payment services must be authorised and registered with the FCA and must comply with the relevant FCA rules. The key requirements are set out in the Payment Services Regulations 2017 (PSRs) and Electronic Money Regulations 2011 (EMRs). Some of the FCA’s Handbook is also relevant to PSPs.
Key distinctions: agents vs distributors
The Financial Conduct Authority maintains distinct regulatory requirements for third-party companies serving APIs and EMIs, with separate frameworks governing those operating as agents versus distributors.
Generally, the word ‘agent’ refers to an entity or person who will act on your behalf.
In the payment services and e-money landscape, an API or EMI may appoint an agent to provide electronic money services to its customers. The agent does not need to be directly authorised by the FCA. Instead, it makes use of the FCA licence of the firm that has appointed it. That firm will be responsible for the agent. It is important to note the following:
- Only an agent can provide payment services for a firm: Only an agent can provide payment services on behalf of a firm, meaning a distributor cannot. This means that any third-party company that provides payment services for an API or EMI must comply with the agency rules under the PSRs and EMRs.
- Only an EMI can issue e-money: The FCA also states that an agent or distributor cannot issue e-money for an EMI. Only an EMI itself can do this. The agent or distributor may only distribute or redeem e-money for the EMI.
- What a distributor can and can’t do: Unlike an agent, a distributor itself cannot provide payment services. This means that a distributor will likely be more focused on the sales and marketing of an e-money or payment service.
The FCA has stated in an approach document that a person who ‘simply loads or redeems e-money on behalf of an EMI would, in principle, be considered to be a distributor’.
One example would be the selling of a payment card by a shop where the card would be promoted and sold, but the actual transactions relating to the card would not be dealt with by the distributor.
It will not always be clear if a third party needs to be appointed as an agent or distributor. In each case, you will have to look carefully at the arrangement and what the third party does.
This is important because the FCA approach and regulations are different for agents and distributors. One main difference is the approval and registration process that exists for agents. There is no similar registration process for distributors, but you may need to let the FCA know about your use of distributors when you apply for authorisation or if you appoint or remove a distributor once you are authorised.
Agent registration requirements and process
The FCA requires each API or EMI to register its agents on its Connect System for approval in advance of the distributor carrying out services on their behalf. The information required by the FCA is detailed and includes the following:
- Name and address of the agent.
- Where relevant, the internal control mechanisms that will be used to comply with relevant anti-money laundering requirements.
- The identity of the directors and persons responsible for the management of the agent and if the agent itself is not a PSP, evidence that they are a fit and proper person. The FCA expects you to carry out your own fitness and propriety checks on your agents in advance of the application, and these should be proportionate to the nature and scale of risk of the services to be carried out by the agent.
- The payment services for which the agent is appointed.
- The unique identification code or number of the agent, if any.
- Other information the FCA might reasonably require. (This might include, for example, more information about the fitness and propriety checks).
Other points to consider:
- What is the timeline for approval? The FCA may take two months to decide on an application to register an agent. Once approved, the FCA will update the Financial Services Register with the agent’s details.
- Can the FCA reject the application? The FCA may decide not to approve your application to include your agent on the Financial Services Register. This might happen if there is insufficient information provided or if the FCA is not satisfied that directors and persons responsible are fit and proper or for other reasons relating to money laundering requirements.
- What if I need to amend my agent's details? You should advise the FCA through Connect if you have to amend the details of your agent, through the appropriate form. The FCA might also ask you for more information before they approve the change. Similarly, if you no longer require the services of your agent, you should inform the FCA.
- What other regulatory requirements are there if I appoint an agent? The FCA states that you should, if applicable, also ensure that the Money Service Business Register of HMRC is also up to date and that any agents submitted to the FCA are also included in the premises notified to HMRC.
Oversight and accountability
The FCA, as well as the PSRs and EMRs, makes it clear that the API or EMI remains responsible for all the activities of its agents and distributors. This would include anything not done by its agent or distributor that should have been done.
The FCA also requires each API and EMI to ensure its agents comply with the applicable conduct of business requirements of the PSRs and EMRs. It expects APIs and EMIs to have appropriate systems and controls in place.
In relation to anti-money laundering, the FCA expects APIs and EMIs to demonstrate they have appropriate policies including internal control mechanisms for countering any risk presented by an agent in furthering financial crime.
You will have to make sure that these controls are regularly reviewed throughout the time you have appointed an agent.
Consumer Duty obligations
The Consumer Duty came into force in July 2023 and is a flagship policy of the FCA aimed at improving standards for consumers and, in particular, achieving ‘good outcomes’ for them.
The FCA is clear that Consumer Duty also applies to APIs and EMIs and that the API/EMI is responsible for ensuring its agents and/or distributors comply with the Consumer Duty.
Because the customer-facing part of a payment services relationship will often be designed and managed by a distributor and/or agent, this will be an important factor for an API or EMI to manage. For example, you might need to review how your agent or distributor sells to more vulnerable customers.
The Consumer Duty can be complex to navigate so please speak to one of our financial services solicitors to get the advice you need.
Contract management and legal considerations
To maintain responsibility for your agents and distributors, you should ensure your legal agreements include what you need. This will differ depending on whether the third-party acts as an agent or distributor. However, in both cases, the respective contracts should specify what information you need from your agents and distributors and when you need it.
You should specifically ensure that the contract enables you to show that you have appropriate and effective anti-money laundering controls in place.
Depending on the extent of the activity undertaken by the agent or distributor, you may also need to ensure that the agreements you enter into are compliant with the FCA’s requirements relating to material outsourcing.
Because of the applicability of the Consumer Duty, the agreement should allow you to change your distribution strategy if you need to. Similarly, you should be able to change the way your service is sold to consumers by an agent or distributor so that it is appropriate for all groups of consumers, including those who are vulnerable.
Our solicitors can help guide you through this.
Ensuring regulatory compliance
Careful navigation of regulatory requirements when working with agents and distributors is key to ensuring compliance. Understanding the distinctions set out here, and implementing proper compliance measures is important for the success of your business. Our financial services team can help you:
- Structure appropriate agent and distributor legal agreements
- Develop robust compliance frameworks
- Navigate FCA authorisation and registration requirements
- Ensure Consumer Duty alignment
Our financial services team can discuss your specific needs and ensure your business meets all regulatory obligations while maximising operational efficiency.
