Let's Not Confuse E-money Agents and Distributors

The European Banking Authority has issued an opinion that goes some way to clarifying when e-money institutions create an "establishment" when dealing through "agents" and "distributors", though it does not go far enough to be terribly useful (to be covered in another post...). In reaching that opinion, however, it has managed to create confusion over the distinction between agents and distributors. This is unfortunate, given the very significant difference in legal responsibility for the EMI and the time it takes to set up such arrangements - sometimes on a large scale, where chains of small retail outlets or multiple independent online retailers offer prepaid cards, top-up vouchers etc for the issuer.

The EBA accepts that e-money institutions (EMIs) can operate through either:

• 'agents' who provide regulated payment services on the EMI's behalf and must be registered by the EMI with the regulator; or

• 'distributors' who do not provide regulated payment services on the EMI's behalf, so the EMI merely has to notify the regulator that the distributor is being used rather than register it.

But the EBA then states that: 

"...if a distributor receives funds from an end-customer in exchange for e-money, the funds are considered to have been received by the issuer itself, considering that the distributor is acting on behalf of the issuer. The safeguarding obligation of the issuer starts as soon as the distributor receives the funds from the customers, and remains with the issuer/EMI (not with the distributor), so that the customer does not bear any consequence of the funds not being transferred from the distributor to the issuer, including in the event of the distributor's insolvency."

I also notice this has also been picked up by the FCA in its guidance on safeguarding in the Approach document, for example:

"10.28 An institution may receive and hold funds through an agent or (in the case of EMIs and small EMIs) a distributor. The institution must safeguard the funds as soon as funds are received by the agent or distributor and continue to safeguard until those funds are paid out to the payee, the payee’s PSP or another PSP in the payment chain that is not acting on behalf of the institution. The obligation to safeguard in such circumstances remains with the institution (not with the agent or distributor). Institutions are responsible, to the same extent as if they had expressly permitted it, for anything done or not done by their agents or distributors (as per regulation 36 in the EMRs and regulation 36 in the PSRs 2017)...

10.34 Where relevant funds are held on an institution’s behalf by agents or distributors, the institution remains responsible for ensuring that the agent or distributor segregates the funds. "

Elsewhere, the FCA states that

5.6...In our view, a person who simply loads or redeems e-money on behalf of an EMI would, in principle, be considered to be a distributor.

However, the FCA states:

8.338 It is important to recognise that if an agent of an e-money issuer receives funds, the funds are considered to have been received by the issuer itself. It is not, therefore, acceptable for an e-money issuer to delay in enabling the customer to begin spending the e-money because the issuer is waiting to receive funds from its agent or distributor.

These passages might be read as supporting the notion that a distributor is entitled to hold funds on behalf of an EMI, albeit in a segregated bank account, and the EMI is entitled to rely on the distributor to transfer those funds to the EMI's account. 

But in my view, if a distributor were to act in that way it would be operating a payment service (e.g. money remittance) and would therefore need to be either authorised in its own right or registered as an agent of the EMI. In other words, there would be no distinction between an agent and a distributor.

In fact, the role of distributor was created in order to avoid the need for agency registration in a particular scenario (e.g. small retailers whom the EMI would find it difficult to be responsible for registering and supervising); or for the distributor to concern itself with regulatory risk and responsibilities. 

The EMI's obligation to register an agent (and, more importantly, liability for the agent's activities on the EMI's behalf) is avoided by requiring the distributor to keep a 'float' of a minimum amount of funds in an account which the distributor agrees the EMI will draw upon whenever the distributor's system reports to the EMI's system that a customer in one of the distributor's outlets has bought a prepaid card or otherwise loaded funds onto a card or wallet issued by the EMI. 

In that scenario, neither the customer nor the EMI is taking any risk at all that the distributor might fail to transfer funds paid by the customer. The EMI has instant access to the float of funds previously paid by the distributor, and safeguards those funds if the e-money issued to the customer is not spent within the next business day.  Meanwhile, the distributor retains any money paid by the customer as effectively reimbursement for the amount that the EMI has deducted from the distributor's float.