As part of its ongoing scrutiny of compliance standards among payment and e-money institutions, the Financial Conduct Authority (FCA) continues to refine its supervisory expectations in priority areas. These include financial crime controls, safeguarding customer funds, operational resilience, governance and the Consumer Duty.
A particular area of focus is the use of ‘agents’ and ‘distributors’ by these firms. This concern is now evident not only in the FCA’s approach to supervision but also at the authorisation stage, where applicant firms are increasingly being required to accept a limitation not to onboard agents or distributors unless explicitly approved. This reflects the FCA’s position that such arrangements cannot be added as an afterthought but must be subject to prior assessment and scrutiny.
Regulatory Framework: What the FCA Has Said
The Payment Services Regulations 2017 (PSRs) and the Electronic Money Regulations 2011 (EMRs) allow Payment Institutions (PIs) and Electronic Money Institutions (EMIs) to use third parties in delivering certain services.
- “Agents” may provide payment services under the oversight of the principal firm.
- “Distributors” may distribute and redeem (but not issue) e-money on behalf of an EMI.
Firms are fully responsible for the acts and omissions of their agents and distributors, as if these had been carried out by the firm itself. Accordingly, the FCA expects firms to have robust systems and controls in place to oversee such activities effectively.
FCA Expectations and Identified Issues
In its March 2023 Dear CEO letter to the payments portfolio (i.e. firms authorised or registered under the PSRs or EMRs), the FCA stated:
“it is the responsibility of the PI / EMI to ensure that its agents are registered with the FCA. PIs and EMIs must also take all reasonable steps to ensure, both at onboarding and on an ongoing basis that any agents they use comply with the PSRs/EMRs (as applicable), and that the PI or EMI has appropriate systems and controls in place to effectively oversee the agent’s activities;
EMIs using distributors to distribute and redeem e-money have to identify their proposed use of distributors to us (although individual distributors do not need to be registered). As with agents, an EMI is responsible for anything done or omitted by a distributor in carrying out activities on behalf of the EMI. Unlike agents, however, distributors are not permitted to provide payment services; and
we expect PIs and EMIs to ensure that where their agents and distributors are advertising or promoting their regulated activities, their customer communications are fair, clear and not misleading, and also make clear for which PI or EMI the agent or distributor is acting.”
Subsequently, in its ‘Priorities’ letter to CEOs in February 2025, the FCA reiterated its expectation that firms:
“take a robust and holistic approach to agent and distributor oversight. You should be actively monitoring your agents to ensure your compliance with relevant regulations and to minimise potential customer harm, and you should actively address any shortfalls with them.”
Oversight and Due Diligence Are Not Optional
The FCA’s interventions are driven by a pattern of poor industry practice in onboarding and monitoring agents and distributors. Between 2009 and 2018, the FCA’s supervisory approach was primarily reactive, characterised as “complaints-led” in relation to conduct of business.
Since 2018, however, a resourced and proactive supervisory regime has been in place. The regulator now conducts more direct testing of compliance standards, with key findings disseminated through public letters or private supervisory engagement. (Notably, the FCA has renamed its ‘Supervision’ division as ‘Market Interventions’, a signal of its proactive posture.)
Key failings include:
- Inadequate due diligence prior to onboarding;
- Weak Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) checks;
- Insufficient monitoring and record-keeping;
- Misleading financial promotions; and
- Lack of clarity over authorised activities and permissions.
From the regulator’s perspective: when a customer interacts with your agent, they are interacting with you. If harm arises, the regulated firm will be held accountable.
Case Study: Modulr Finance
A notable example of the FCA using its enforcement powers was the Voluntary Requirement (VREQ) agreed with Modulr Finance in October 2023. The VREQ addressed weaknesses in the firm’s agent/distributor onboarding and oversight.
While framed as “voluntary”, it is understood that failure to engage would have led the FCA to impose the restriction unilaterally using its own-initiative powers under s.55L FSMA. The effect was the same: Modulr was prevented from onboarding new agents and distributors while the issues were remediated. The restriction was lifted in July 2024.
From Policy to Practice: Execution is Key
While many firms maintain agent/distributor management policies, the FCA has identified a disconnect between policy and practice. Supervisory reviews increasingly assess:
- Execution and operational control;
- Availability of audit trails and decision documentation;
- Quality of management information;
- Defined offboarding triggers and evidence of their use;
- Ongoing skills and competence assessments; and
- Escalation and remediation procedures.
The FCA expects more than conceptual compliance. It wants evidence of proactive, repeatable and auditable practices, ones that can withstand stress-testing against the PSRs, EMRs, the FCA’s Approach Document, and the Consumer Duty.
Consumer Duty
Under the Consumer Duty, firms must demonstrate how their use of agents and distributors supports good customer outcomes. This extends beyond compliance to include:
- Communication effectiveness, are agents equipped to support customer understanding?
- Friction or confusion in customer journeys introduced by distributors
- Commercial incentives, do they align with delivering positive outcomes?
Firms must now incorporate consumer outcome risk into their governance and oversight, reflecting a more holistic view of harm prevention.
What Firms Should Do Now
Firms not currently subject to a Section 165 information request or other supervisory scrutiny should act now to strengthen compliance:
- Reassess their agent/distributor register to ensure clarity over roles, permissions and activities.
- Conduct a gap analysis of both pre-appointment and ongoing monitoring processes.
- Refresh risk assessments to include Consumer Duty considerations.
- Ensure senior managers can evidence oversight and articulate how they challenge and supervise delegated relationships.
- Review financial promotions to ensure that messages controlled by agents remain compliant and accurate.
- Strengthen documentation, especially the ‘what’, ‘when’, ‘why’ and ‘who’ behind decisions.
The FCA has made it clear, agents and distributors will remain a focus of regulatory oversight.
How Complyport Can Help
Complyport has extensive experience supporting payments and e-money institutions in enhancing governance, compliance frameworks and regulatory engagement strategies.
We assist firms with:
- Reviewing and strengthening agent/distributor oversight
- Designing audit-ready onboarding and monitoring controls
- Aligning oversight procedures with Consumer Duty
- Preparing for FCA thematic reviews, s165 requests, and VREQ negotiations
Book a meeting with one of our Subject Matter Experts to discuss your firm’s compliance readiness. We’ll help you navigate regulatory expectations with clarity and confidence.
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Author:
Payment Services
