On 2 March 2021, the Financial Conduct Authority (FCA) launched a consultation CP21/4 on its proposals for regulation of the pre-paid funeral plan sector. This follows concerns raised about the conduct and financial soundness of some pre-paid funeral plan providers.
Under the proposals, activities involving the provision and distribution of pre-paid funeral plans will come under FCA regulation from 29 July 2022. Focused on ensuring better value products, better sales practices, and better controls, the proposed new rules seek to give consumers confidence that they will receive the funeral they have agreed.
Who does the consultation impact?
This consultation will be relevant for:
- Firms that sell or carry out funeral plan contracts for funerals in the UK
- Investment advisers who provide advice on funeral plan contracts
- Insurance firms who provide life insurance policies that back some funeral plans
- Trustees of trusts and discretionary investment managers who manage the assets of trusts that back some funeral plans
- Trade bodies representing firms that carry out or sell funeral plan contracts, including those representing funeral directors
- Groups representing consumer interests
- Consumers that have a funeral plan, or are thinking of purchasing one
- Firms that will not be able to continue to administer existing contracts and will be required to cease all activities in relation to funeral plans
The FCA is asking for feedback on its proposals in CP21/4 by 13 April 2021. The FCA will consider the feedback it receives during the consultation period, and will publish its final rules in a Policy Statement in July 2021.
Scope of future FCA regulation
From 29 July 2022, activities involving the provision and distribution of pre-paid funeral plans will come under FCA regulation, and firms conducting these activities will need to be authorised by the FCA.
The definition of a 'funeral plan provider' will be extended to include those who have assumed the obligation to provide (or secure the provision of) a funeral as a result of a novation, assignment or transfer of an existing funeral plan contract. This means that where books of funeral plans are sold, the entity that buys them will be carrying out those funeral plan contracts as the provider, and will need to be authorised by the FCA.
Exclusions and limits of the FCA's regulation
Funeral plans that are entered into by local authorities, or where the customer and plan provider intend or expect the funeral to occur within one month of sale, or which only provide for funerals outside the UK, will fall outside of the scope of the FCA regulation.
Summary of the FCA's proposals
The FCA wants to see better value products, better sales practices, and better controls in place so consumers can be confident they will receive the funeral they have agreed.
Products must meet consumer needs - The FCA proposes to ban the sale of products that do not provide for funeral services in all circumstances on the consumer's death.
Products must represent fair value - The FCA's proposals will require plan providers to ensure that their funeral plans are intended to provide 'fair value'. Responsibility for this will sit with the firm's governing body. The FCA expects to see firms monitor pricing to ensure products are economically viable.
Capital requirements - The FCA proposes to require funeral plan firms to hold adequate financial resources to protect against future risks. The capital resources requirement will vary for providers and distributors, depending on the nature of the activities undertaken by the firm and will increase with the size of the firm's business.
Ensuring services can be delivered - The FCA proposes that funeral plan providers should continue to back plans with adequate trust or insurance arrangements, and that these need to be adequate to ensure delivery of services in line with consumer expectations.
Additional requirements concerning trusts - The FCA proposes a number of rules to ensure that funeral plan providers have robust trust arrangements. Trusts must be established by written instrument, with a majority of independent trustees, an independent fund manager, and with annual accounts prepared by a statutory auditor.
Trust solvency - Funeral plan providers will need to arrange for a solvency assessment report to be produced annually by an actuary. The solvency assessment report must calculate and verify the trust's assets and liabilities, and provide information on the solvency status of the trust on a best estimate basis. This applies to all plans a firm has entered into, including those prior to 29 July 2022. Where a solvency assessment report reveals that a trust has fallen into deficit, funeral plan providers will be required to draw up a remediation plan to remedy the shortfall and if, after the remediation plan period, the trust remains below the required minimum solvency level, the funeral plan provider must rectify any shortfall using its own financial resources.
Conduct standards - The FCA proposes that funeral plan firms comply with the prescribed standards of conduct, such as acting honestly, fairly and professionally in accordance with the best interests of their customers, and ensuring the funeral is provided to a satisfactory quality in line with the plan.
The Senior Managers and Certification Regime (SMCR) - The FCA intends to apply the SMCR to funeral plan firms.
Appointed representative regime (ARR) - The FCA proposes extending the ARR to distributors of funeral plan firms. The ARR allows an unauthorised firm to carry on regulated activities in the UK under the responsibility of a 'principal', i.e. an FCA authorised firm with regulatory permissions for arranging, dealing and/or advising in relation to funeral plans.
Existing funeral plan contracts - The FCA recognises that existing contracts may have been sold on different terms to those in its consultation paper, and its proposals will generally allow these contracts to continue on existing terms.
Commission and other remuneration - The FCA proposes to ban the payment of commission to distributors from 29 July 2022. Distributors will need to be remunerated for their activities by funeral plan consumers only, and their fees will need to be consistent with the duty to act in the customer's best interests.
Marketing communications - The FCA proposes to bring funeral plans within the scope of the financial promotions regime. This means firms will need to ensure they communicate in a way that is clear, fair and not misleading, and keep a record of the financial promotions they communicate or approve.
Pre-contractual disclosures - The FCA proposes that funeral plan firms will be required to set out clearly the scope of the services they offer, as well as key information about their fees and products. This will need to be provided to the customer and their nominated representative in two short standalone documents.
Sales standards - The FCA proposes to ban cold calling by all firms involved in funeral plans. Funeral plan firms will only be able to contact customers (or potential customers) for the purposes of interactive marketing (e.g. by phone or in person), where there is already an established client relationship.
Standards for non‑advised sales - The FCA proposes that funeral plan firms will need to limit the products they propose to the customer to only those they assess as being consistent with the customer's demands and needs.
Standards for advised sales - Funeral plan firms that provide personal recommendations about funeral plan contracts will need to ensure the product they recommend is the one that best meets the customer's needs. This must be based on a fair and personal analysis of the funeral plans market.
Cancellation rights and fees - The FCA proposes that all funeral plans should have a 30‑day period following purchase in which the customer can cancel their plan without any penalty and receive a full refund of all money paid.
Fees - All fees charged by funeral plan firms should only reflect the costs incurred and must not include a profit element.
Post‑contractual actions - Funeral plan providers will be required to nominate a funeral director within a reasonable distance of the customer's home to carry out the funeral. This nomination must be within 30 days of the plan being purchased and must be notified to the customer. The funeral plan provider is required to put in place contractual arrangements to ensure that the funeral director will deliver the funeral as set out in the plan, without any additional payment from the customer or their estate. Funeral plan providers will need to regularly review their arrangements with funeral directors to ensure funerals will be delivered. The FCA proposes to issue guidance that this sort of review should be done at least every twelve months.
Post‑contractual disclosures to the consumer's representative - The FCA proposes that funeral plan providers should send a letter to the customer's representative within five business days of the funeral plan being taken out. This is to ensure that the customer representative is aware of the funeral plan, what it covers and the procedure for making a claim following the consumer's death.
On-going annual disclosure - The FCA proposals will require funeral plan providers to send customers an annual letter setting out important information about their funeral plan. This will include information about the plan features, the customer's payments, cancellation terms and the complaints process.
Plan redemption - The FCA proposes that funeral plan firms will be required to handle the redemption of a funeral plan fairly and promptly. Funeral plan providers must retain full responsibility for ensuring delivery of the plan, even where certain services have been sub-contracted.
Product governance - The FCA proposes applying 'product governance' rules to all firms in the funeral plan sector. This means firms will need to have in place systems and controls for the design, approval, marketing and on-going management of pre-paid funeral plans throughout their lifecycle. The requirements will vary, depending on whether the firm is classified as a 'manufacturer' or a 'distributor'. The FCA proposes that these rules should apply to existing products, as well as new products. Where products do not meet the requirements, firms will need to take remedial action to improve the quality of the product or amend the distribution strategy, or cease offering them for distribution.
Resolution - For both new contracts and those entered into prior to 29 July 2022, the FCA proposes that firms have a resolution manual in place to assist in resolving their business should they fail.
Reimbursement - The FCA expects consumers would be able to receive a prompt reimbursement if, in the event of failure, the firm is not attempting to transfer its obligations for carrying out the contract to another provider or is not able to continue to meet these obligations itself. The FCA has not put forward rules for consultation on the reimbursement amount or funding, but will issue a further consultation in relation to this to set out its proposals later in the year.
Access to the Financial Services Compensation Scheme (FSCS) - The FCA proposes introducing a framework to allow the FSCS to compensate customers of failed firms, which are not able to meet liabilities against them.
Complaints - The FCA will apply the complaints handling requirements in the 'Dispute Resolution: Complaints' sourcebook to ensure that complaints are dealt with promptly, consistently and fairly. This means firms will be subject to prescribed rules on complaints handling and complaints resolution, and also reporting and record keeping requirements.
Dispute resolution - The FCA proposes to bring funeral plan firms within the compulsory jurisdiction of the Financial Ombudsman Service (FOS), where the plan provides for funerals to take place in the UK. The FOS has a statutory duty to resolve complaints. When the FOS upholds a complaint, it can order a firm to make a monetary award to the complainant for an amount it considers to give fair compensation for the loss or damage suffered. The FOS can also direct the firm to take such steps in relation to the complaint that it considers 'just and appropriate'.
What firms must do to prepare
All firms in the funeral plan sector now need to consider how FCA's proposed rules will impact their business and begin to make the necessary preparations.
Applicant funeral plan firms will need to:
- apply directly to the FCA for authorisation from September 2021 or, if appropriate, submit notification to become an appointed representative;
- apply as soon as possible after the application gateway opens in September 2021 – applications made after 1 November 2021 may incur a higher application fee; and
- ensure they meet the FCA's standards to be authorised and, once authorised, follow the FCA's rules.
Funeral plan firms that cannot meet the FCA's standards, as set out in CP21/4, or those which are not authorised before 29 July 2022, are expected to cease trading in relation to funeral plans in an orderly way. Carrying on regulated business without authorisation after rules take effect is a criminal offence.
If you require any assistance with understanding what the FCA's proposed rules for regulating the pre-paid funeral plan sector mean for you, we are here to help.