Payment sub-license (EMI/PI Agent and EMI Distributor): 4 myths that have to be debunked
In the past year, we have received quite many enquiries regarding what some people called “payment sub-license”, something that new industry entrants do not fully understand and become appalled when they learn the truth. What they really mean is a contract to become an Electronic Money Institution Agent (EMI Agent), Payment Institution Agent (PI Agent) or an E-money Distributor.
Our article will help you to better understand what non-bank PSP (payment and e-money institutions) can and cannot do, and learn what the following terms and phrases “payment sub-license”, “EMI Agent License”, “EMI Distributor License”, “PI Agent License”, “Fast Track License” actually mean. It is important to note that the provision of unregulated service (which sometimes, unfortunately, happens while relying on “payment sub-license”) is prohibited and contrary to the legislation in both the UK and EU member states.
What is “payment sub-license” in plain terms?
Legally speaking, there is no such thing as a “payment sub-license”. You either have authorisation or registration with a national competent authority and can be considered a licenced entity or not. Nevertheless, some consultants and certain service providers (whose names shall be omitted, but you can use the power of search engines and easily find them) try to sell their services and hence advertise “payment sub-license” as a fast track to licensing while omitting key aspects of this type of “license,” which is most often nothing more than a contract to become an E-money Distributor. Just think about it, obtaining an authorisation in a month with minimum fees and being allowed to provide regulated services in the UK or the whole of the EEA. Doesn’t it sound too good to be true? Those who wish to enter and participate in the payment service sector should be aware of what they can do and what they cannot, as well as the regulatory compliance obligations, as consequences of non-compliance can be severe.
To illustrate this point, we can make a reference to the recently unfolded case of Premier FX. People were promised complete protection of their funds (in some cases with claims of protection above the FSCS) and above market rate returns (with an interest rate of up to 4.5% monthly) simply for retaining the funds with the entity that did not have authorisation for such activity. In this instance, we are speaking about the firm that was authorised solely for money remittance and which acted outside of its authorisation. Maybe it currently looks a bit far stretched, however, acting outside of the scope of the authorisation is especially relevant when discussing “payment sub-license”. Including word license in the description of this type of entities only adds confusion to what they can do and what they are. Enough of smoke and mirrors, let’s cut to the chase and mention the true name of such entities – EMI Agent, PI Agents and E-money Distributors.
What is an EMI Agent / PI Agent?
EMI Agent / PI Agent is an authorised agent of a firm that is allowed to provide payment services. They are relying on the authorisation of either an EMI or a PI (i.e. the principal) and resell the services of such principal through their own facilities. Plainly speaking, what some call “payment sub-license” is simply a fiduciary relationship between the principal and the agent. In the ambit of payment services, it is initially codified within the PSD 2 and thereafter transferred within the national legislative frameworks of EU member states (and can be found in the one and only ex-member state i.e. the UK).
The EMI Agent / PI Agent can be located either in the home member state or a host member state. The former point is established primarily for the sake of carrying out local transactions that require a network of entities that would allow offering services locally (for example, money remittance agents). In the latter case, the reliance on the agent is based on the freedom of establishment as codified within the TFEU and referenced in other legislative acts of the European Union. Similar to the former point, the latter case has in mind the idea that agents must add functionality to the services that are offered by the principal through reliance on the agents. However, it is also about the accountability of entities providing the services within the EU on a cross-border basis. Whichever entity authorised in one member state may provide services within the whole of the EEA with only one local establishment. However, in certain instances, to be more welcoming to the national market and have specific access to certain facilities (such as national clearing schemes, which sometimes require physical presence), such an entity can establish a local presence by the means of a branch or an agent. It is codified within article 28 of the PSD 2 and provides an explanation on how the passporting is done with the employment of such entities.
So, “payment sub-license” is not a license from a regulator, but what about the services?
Finally, everything starts to make sense, there are no mountains made out of gold, and the so-called “payment sub-license” is nothing more than the agency relationship. But what about the services that the EMI Agent / PI Agent can provide? Notably, there are zero, literally zero, regulated services that the EMI Agent / PI Agent can provide as stemming from such an agency relationship. The services which are provided by the EMI Agent / PI Agent are of a mere introduction to the principal and reselling of the principal’s services. The EMI Agent / PI Agent cannot provide any regulated services in its own right, or purport to provide such. If it is contrary to such restriction, it will be what we have already mentioned- provision of regulated services without having proper authorisation.
The entities relying on the “payment sub-license” can only resell the services of the principal for which the principal registers them with the home state authority and in case of passporting notification involving an agent this information is transferred to the host state authority. In both cases, the agent can provide only the services of the principal, which the principal allowed for the agent to resell on its behalf. Agents are not allowed to ‘inherit’ the ability to perform the new payment services set out in the PSRs 2017 (or national legislation implementing PSD2 in the EU member states) on behalf of the payment service provider for which it was not registered. If the EMI Agent / PI Agent wishes to perform any of the services, this must be authorised by the principal (which must have appropriate authorisation itself) or the EMI Agent / PI Agent must itself obtain a required authorisation from a competent authority. (Read our article that explains how Agents are registered).
Moreover, it must be apparent to the end-user of the services that the EMI Agent / PI Agent is acting on behalf of the principal rather than in its own right. The end-user must be aware of the relationship of the EMI Agent / PI Agent with the principal and the scope of activities that can be undertaken. Furthermore, all regulated activities must remain on the side of the principal and the holder of “payment sub-license” is not itself allowed to engage in regulated activity. It means that all transactions and activity which falls under regulation must be carried out exceptionally through the facilities of the principal. Thus, the EMI Agent / PI Agent is barred from maintaining accounts of solicited clients by itself, the agent is prohibited from executing transactions itself, etc.
Who is responsible for the acts of the EMI Agent / PI Agent?
Notably, even though the EMI Agent / PI Agent is a separate person from the principal, the principal retains ultimate responsibility for all actions or omissions of the agent, as if the principal would itself commit such act or omission. This is because there is such a concept as vicarious liability where the principal remains liable for all acts of its agent. All activity of the agent must be supervised by the institution which performed checks on the agents and allowed them to offer its services. However, it does not mean that the EMI Agent / PI Agent will be exempt from all failings that it undertook whenever relying on “payment sub-license” and in case of severe violations it may be held liable together with the principal. It is especially true in instances where the agent acted outside the scope of its authority (e.g. offered services in its own name, undertook regulated activity on its own, etc).
What about E-money Distributors?
Regulation 33 of the EMR 2011 (UK), as well as Article 3(5) of EMD 2 (EU), states that an EMI may distribute or redeem e-money through an agent or a distributor, but may not issue e-money through an agent or distributor. While electronic money institutions are not permitted to issue electronic money through distributors, they are permitted to provide the payment services, directly related to the distribution and redemption of e-money through distributors.
Unlike the EMI Agent and PI Agent, the E-money Distributor cannot provide payment services of the EMI through their facilities and there is no requirement to register distributors with the regulators, so it is important to understand the difference between the two. In the FCA’s view, a person who simply loads or redeems e-money on behalf of an EMI would, in principle, be considered to be an E-money Distributor. As with agents, an EMI is responsible for anything done or omitted by its E-money Distributor. Furthermore, an authorised EU member state EMI may engage its E-money Distributor in the exercise of its passporting rights.
This is where it gets complicated, isn’t it? To add some clarity see the table below that details what PI Agent / EMI Agent and E-money Distributor can and cannot do as compared to an authorised EMI.
Let’s throw in some practical examples. Let’s assume you are an IT development company that has created a brilliant mobile app for the electronic wallet that can be used for online and POS purchases with the payment card. You approached and EMI which is authorised in the UK and want to leverage off their authorisation and become distributors of their services. Such an EMI has to have authorisations to issue, distribute and redeem electronic money (service of electronic money issuance under Electronic Money Regulations 2011) as well as issue payment instruments (service (e) under paragraph 1 Part 1 Schedule 1 of the Payment Services Regulations 2017). Issuance of the payment card is directly related to the provision of the electronic money services; therefore you only need an E-money Distributor agreement with the principal EMI, registration as an agent with the FCA is not needed.
So, you signed the distributor agreement with the EMI and a payment card co-brand agreement, you opened an account with the bank, where customer e-wallet top-ups will be handled, and you are ready to go. Most likely you did not read the distributorship agreement thoroughly, as at this stage the compliance officer of the principal EMI told you that you cannot handle the issuance of the electronic money, i.e. the process where a user of your app top-up the electronic wallet held by the principal EMI. All top-ups of the users of your app have to be handled using sort code and account number or an IBAN issued by the principal EMI. In other words, you cannot handle clients’ funds, yet safeguard them, it is the duty and the obligation of the principal. From paragraph 10.28 of FCA Payment Services and Electronic Money – Our Approach:
“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).”
Let’s assume you sorted out all issues, and finally got your mobile app running, and now turned onto the idea of providing card acquiring services, you found a bank that is willing to work with you under a payment facilitator agreement but ran into a problem. The compliance officer of the bank asked for a copy of your regulatory authorisation to provide the acquiring services, you sent them your E-money Distributor agreement with the principal EMI but the bank’s compliance turned you down. Why is that? Oh, first of all, you can only provide the services of your principal EMI, secondly, although your principal does have authorisation for service (e) under paragraph 1 Part 1 Schedule 1 of the Payment Services Regulations 2017 which includes acquiring of the payment instruments, they are not providing such service at all, and last but not least, card acquiring is not related to the issuance/distribution/redemption of the electronic money, thus your principal EMI has to register you as an EMI Agent with the FCA, and such registration can’t be obtained, since principal EMI did not inform the FCA about the fact that they are starting to provide card acquiring services. So, your new project can’t work, unless you obtain your own EMI or PI authorisation from the FCA.
So, summarising all of the above, and based on the fact that payment institutions and electronic money institutions carry ultimate responsibility of anything that is done or omitted by their agents and/or distributors, as well as the fact that the responsibility to the safeguarding of the end-user funds lies with the principal, we can debunk the following myths about so-called “payment sub-license”:
|Myth Nr. 1 – agent/distributor can provide any services of their liking||Agent/distributor cannot provide any services in their own right, they can only act as resellers/distributors of the service that the principal PI/EMI is authorised to provide and actually have developed and providing it. Agent/distributor cannot out of the blue create/develop their own service/product and start providing it.|
|Myth Nr. 2 – agent/distributor can onboard and approve any clients at their own discretion||EMI Agent / PI Agent and E-money Distributor cannot onboard and approve any client without such client being checked and authorised by the compliance department of the principal PI/EMI. As a minimum, the compliance department of the principal PI/EMI must shadow the onboarding process of the agent/distributor and ensure that the compliance principles and tools used are adequate or replicate those used by the principal PI/EMI. The principal can order the EMI Agent / PI Agent and E-money Distributor to terminate any client relationship and is ultimately responsible for filing any SARs. Without such a methodology, it will be practically impossible for the principal PI/EMI to fulfil their obligations related to anti-money laundering, counter-terrorism financing, and prevention of financial crime.|
|Myth Nr. 3 – agent/distributor can handle client’s funds through their own bank accounts||While funds related to some basic services such as cash remittances conducted through the physical locations of the agents can be handled through the bank account of the agent (until they reach an account of the principal), for most of the money transfer and acquiring related payment services and all of the e-money related services, client’s funds can only be handled and safeguarded by the principal PI/EMI. Otherwise, it will be practically impossible for the principal to ensure segregation and safeguarding of the client’s funds in accordance with the regulatory obligations. Principal PI/EMI may open dedicated (to a particular agent or distributor) segregated and/or safeguarding bank accounts but such accounts are opened in the name of the principal PI/EMI and the EMI Agent / PI Agent and E-money Distributor have no title or access to such accounts.|
|Myth Nr. 4 – agent/distributor can keep all the client’s records in their own IT system||While the EMI Agent / PI Agent and E-money Distributor can and should maintain their own IT systems and applications for facilitating principal PI/EMI payments and e-money services, in most circumstances, agent’s/distributor’s IT platform is merely a front-end web or mobile application that connects via an API to the back-end of the principal and feeds the information gathered from such back-end to the client. Any other design of the information and data flow is practically impossible, as a principal PI/EMI wouldn’t be able to comply with the regulatory compliance obligations in respect of the record-keeping, AML, CTF, Data Protection, and others.|
Therefore, if someone, being a principal PI/EMI, is offering you an EMI Agent / PI Agent or E-money Distributor relationship and saying that you will be able to do all these things we’ve just debunked above, run away, as such PI/EMI does not know what they are doing. By engaging with them you are at risk of wasting your precious time and money as your relationship with such PI/EMI may be short-lived due to either regulator’s order to terminate such relationship or even the regulator’s decision to pull their authorisation, if such PI/EMI has been misusing the EMI Agent / PI Agent or E-money Distributor relationships for a while.
Having said all that, we do not want to discourage you from exploring the avenue of becoming an EMI Agent / PI Agent or E-money Distributor, it is a great instrument for some of the businesses, especially in the SaaS space, which wants to monetise their existing client base and offer additional service and create an ecosystem for their clients.
A great example of such an arrangement would be a cloud accounting software company, which is providing accounting, tax reporting and filing, electronic invoicing, and other services to SMBs and self-employed. They do offer an API integration with the banks to feed the bank account data into their system but missing out on additional monetisation. They could become an E-money Distributor of an EMI that provides required e-money services, currency exchange, and money transfers, and offer their existing clientele opening of the e-wallet/payment account with such an EMI. It is a win-win situation for both the software company and EMI as well as the clients, as software company can increase their revenues, EMI onboards thousands of low-risk clients, clients receive all services that they ever need to run their SMB, no more need for the high street bank and at least 50% savings on money transfer and currency exchange fees.
If you don’t want to fall into a trap of improper EMI Agent / PI Agent or E-money Distributor relationships that does not suit your business model, seek some advice from PSP Lab via free of charge 30 minutes consultation. Keep in mind that the principal PI/EMI is very likely to require you to develop and implement certain risk management policies in line with their own regulatory compliance obligations, and we can certainly assist you with that as well.