California Adds Limited Agent of A Payee Exemption to Its Money Transmitter Licensing Requirement; Relaxes Right To Refund Disclosure Requirement for Online Transactions

Following an extended period of public comment and modifications to legislation first proposed in the beginning in March of 2013, the California legislature recently passed a series of amendments to its Money Transmission Act to exempt from licensure companies that process payment transactions solely as agents of the intended recipient of the payment. California joins New York, Nevada, and Ohio, among others, in the ranks of states that have formally adopted some form of the “agent of a payee” exemption to licensure.  Among other technical changes, the amended law also removed the requirement that certain online money transmission transactions (“e-commerce” transactions) include a “right to refund” notice on the money transmission receipt.

Under the new legislation, an entity that receives money from a person for payment for goods or services to a third party does not need to obtain a money transmitter license if (i) the entity is an “agent of the payee pursuant to a preexisting contract” and (ii) the payee is a “provider of goods or services who is owed payment of money…from the payor for the goods or services.”[1]  Under existing California law, an agent is “one who represents another, called the principal, in dealings with third persons.”[2] Under the payee-agent theory, these types of transactions pose fewer risks to consumers because payment to the agent is considered payment to the principal, and even if the agent fails to remit the payment to the principal, the payor’s payment obligation to the principal is deemed satisfied.  California’s embrace of the payee-agent model suggests that operators of certain third-party bill payment services may not need to obtain money transmission licenses in California.  The bill did not specify any requirements for the written contract between the agent and the payee. Recognizing the speed at which online transactions typically occur, the California legislature also exempted licensed money transmitters in “e-commerce” transactions from the requirement to provide a detailed “Right to Refund” disclosure statement.[3]  E-commerce transactions are defined under the amendment as “any transaction where the payment for goods or services is initiated via a mobile application or an Internet Web site.”[4] Prior to the amendment, licensees were required to disclose to consumers the terms and procedures for obtaining a refund from the licensee if the licensee failed to forward payment to the intended recipient within ten days of submitting payment to the licensee. The amendment presumes that senders of funds via electronic means reasonably expect the funds to be immediately processed by the licensee and transmitted to the recipient, making the Right to Refund disclosure unnecessary.

California has yet to issue any regulations stemming from the initial enactment of the Money Transmission Act in January 2011. The full text of the amendment, which was signed by the governor on September 20, can be reviewed here.