If your business provides e-money or payment services in the UK, you’ll need to understand the regulatory distinctions and obligations that apply when working with agents or distributors.
The Financial Conduct Authority (FCA) has made clear that the rules differ significantly depending on how these third parties are classified, and getting it wrong can lead to serious compliance issues. This article explains how the FCA regulates agents and distributors, what the key differences are, and what your obligations are in each case. If you are appointing a third party – or acting as one – our financial services solicitors can guide you through the legal, contractual, and compliance requirements to help you stay on the right side of the rules and reduce regulatory risk.
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), including 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 outlined in the Payment Services Regulations 2017 (PSRs) and the 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 utilises 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 providing payment services for an API or EMI must comply with the agency's 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 is the sale of a payment card by a shop, where the card is promoted and sold, but the distributor does not handle the actual transactions related to the card.
It will not always be clear if a third party needs to be appointed as an agent or distributor. In each case, you will need to carefully examine the arrangement and the actions of the third party.
This is important because the FCA's approach and regulations differ 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. Still, 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 fit and proper persons. 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 may also request additional information before approving 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 up to date and that any agents submitted to the FCA are also included in the premises notified to HMRC.
Oversight and accountability
Agent and distributor compliance responsibilities sit firmly with the API or EMI under FCA rules. 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 need to ensure that these controls are regularly reviewed throughout the period 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, particularly in 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 is often designed and managed by a distributor and/or agent, this will be an important factor for an API or EMI to consider. For example, you may need to review how your agent or distributor approaches and sells to more vulnerable customers.
The Consumer Duty can be complex to navigate, so please consult with one of our financial services solicitors to receive the advice you need.
Contract management and legal considerations
To maintain responsibility for your agents and distributors, ensure that your legal agreements include the necessary provisions. This will differ depending on whether the third party acts as an agent or distributor. However, in both cases, the respective contracts should specify the information you need from your agents and distributors, as well as 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.
Due to the applicability of the Consumer Duty, the agreement should permit you to adjust your distribution strategy if necessary. Similarly, you should be able to change the way your service is presented to consumers by an agent or distributor so that it is suitable for all groups of consumers, including those who are vulnerable.
Our solicitors can help guide you through this.
Ensuring regulatory compliance
Careful management of agent and distributor compliance obligations is essential to ensure FCA alignment and reduce business risk. The classification and oversight of agents and distributors in the e-money and payment services sector can be complex, particularly when considering the evolving requirements under the Consumer Duty. Whether you're preparing FCA registration documents, reviewing contracts, or assessing your internal controls, our financial services solicitors can help you build a compliant, commercially practical framework. We support APIs, EMIs and third-party providers in ensuring their arrangements are legally robust, operationally sound, and fully aligned with UK financial services regulation.
