Three and a half years after the last amendment to its Money Transmission Act (“MTA”), California stated its intent to change its exemptions for certain payment processors through regulation. This past February, the Money Transmitter Division of the California Department of Business Oversight (“DBO”) issued six opinion letters responding to questions from payment processors about the MTA, an unusually high amount for one month. These entities all sought to determine whether their specific circumstances warranted obtaining a money transmission license from the division.
California defines three different actions as “money transmission”: the selling or issuing of payment instruments, the selling or issuing of stored value, and the receiving of money for transmission. Throughout February the DBO answered a number of payment processors, which are companies hired by merchants to handle transactions from various possible channels, often using online or mobile platforms (their names have been redacted). These companies have been primarily concerned with whether their receipt of money for transmission on behalf of their clients warrants licensing under the state’s MTA.
In February, the department responded to six payment processors, five of which inquired about exemption from the MTA under the same grounds: Financial Code section 2010(l), known as the “agent of payee” exemption. Last month the DBO also posted three other opinion letters on the same topic dated in 2017 and early 2018. The “agent of payee” exemption applies to payment processors when the processor (i) has a written contract with its client establishing this relationship, and (ii) the delivery of money to the processor (i.e., the “agent”) satisfies the payor’s obligation to the payee (i.e., the merchant). Under these circumstances, the processor (agent) is not required to obtain a money transmission license from the DBO.
The DBO refused to apply section 2010(l) to the circumstances laid out in five of the most recent opinion letters, stating that because it intends to propose a regulation concerning the agent of payee exemption “in the near future,” it would “decline to opine on the applicability of the exemption.” However, because of its stated intention to change the exemption “in the near future,” the DBO also did not require any of these payment processors to obtain a money transmission license.
As of the date of this publication, the DBO has yet to issue a regulatory proposal concerning this exemption. It is unlikely that the impending proposal will remove the exemption entirely, as the DBO applied the agent of payee exemption in the three other opinion letters that were posted in late February. Beyond that though, we do not have a clear picture of what the future changes may look like, as the declined letters lacked specific facts, and the DBO did not venture past the two-pronged analysis laid out above in making its determinations.
It is notable that the agent of payee exemption was first made in a 2014 amendment to the MTA; thus the DBO has decided in less than four years that changes are necessary. Within this timeframe the money transmission industry has been substantially affected by the growth of digital currencies, and California has so far been unsuccessful at passing legislation to regulate the transmission of digital currencies. It is possible that in addition to changing the agent of payee exemption, this impending proposal will also seek to address this issue.
For a complete list of California’s money transmitter licensing guidance, and the money transmitter licensing guidance from other states, see Bloomberg Law’s Money Transmitter: Licensing Guidance Tracker.
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