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FCA pre-paid funeral plan regulation starts on 29 July: What you need to know

On 29 July 2022 the Financial Conduct Authority will start regulating providers and intermediaries in the pre-paid funeral plans sector. The change affects: 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 that provide life insurance policies backing some funeral plans; trustees of trusts and discretionary investment managers who manage the assets of trusts that back some funeral plans; and insolvency practitioners.

Walker Morris Head of Regulatory & Compliance Jeanette Burgess summarises the key points.

What is happening?

Providers (firms that enter into and administer funeral plan contracts, including those sold before FCA regulation) and intermediaries (firms that sell funeral plans to customers on behalf of providers) have been required to apply for direct authorisation or become an appointed representative of a principal firm prior to the onset of regulation.

Continuing without authorisation from 29 July onwards will be a criminal offence. On 17 July, the FCA published a list of the providers it intends to authorise, together holding approximately 87% of existing customer plans.

The FCA is also imposing new rules on the sector to make sure consumers are properly protected, including banning cold calling and all commission payments to intermediaries to make sure products offer fair value, and high standards of governance and financial resilience.

There are further rules aimed at protecting customers if their regulated funeral plan provider fails. They cover resolution of funeral plan firms, requirements for the structure of funeral plan providers’ trust and insurance arrangements, and access to the Financial Services Compensation Scheme. There are also obligations for firms to notify customers and nominated representatives following a transfer of funeral plan contracts.

The FCA is also consulting until 27 June on amendments to the Compensation rules relating to the FSCS in relation to funeral plans and to the Funeral Plan: Conduct of Business sourcebook. Among other things, this follows on from the government’s announcement that it will place an additional statutory duty of co-operation on insolvency practitioners requiring them to co-operate with the FSCS if a regulated funeral plan provider fails.

Why is it happening?

The FCA and HM Treasury identified a number of risks arising from the practices of some firms in the sector, resulting in HM Treasury legislating to bring pre-paid funeral plans into regulation. They include: plans not meeting consumers’ needs or expectations; high-pressure sales tactics by some intermediaries; high prices relative to product benefits; poor governance and controls; plans going unclaimed; and poor financial management of trusts.

The new rules – key elements

The FCA says it wants to see an improvement in outcomes for consumers, with better value products, better sales practices and better controls in place so consumers can be confident they will receive the funeral they expect. Here are the key elements of the new rules:

  • Products which meet consumer needs: A ban on the sale of products which do not provide for funeral services in all circumstances on the consumer’s death.
  • Plans must be sold fairly: Firms must only offer products which are consistent with consumer demands and needs. There will be a ban on cold-calling, enhanced pre-sale disclosure and new standards on advertising.
  • Products must represent fair value: A ban on commission payments to intermediaries; a requirement on providers to ensure that remuneration they receive from the trust or insurance provider does not negatively affect the product; fees charged outside of the headline price of the plan must be a genuine reflection of the costs incurred by the firm, and not be used to drive profits.
  • Improving governance standards and oversight: Firms must have proper controls in place to manage risks. The Senior Managers and Certification regime, and systems and controls rules on conflicts, risk management and controls over outsourcing, will apply (in a proportionate way).
  • Ensuring services can be delivered: Firms to have appropriate risk transfer arrangements in place to ensure delivery of services in line with consumer expectations, including backing plans with adequate trust or insurance arrangements. Firms expected to monitor pricing to ensure products are economically viable, and to hold capital to protect against future risks.
  • Backstops in place should things go wrong: Firms required to have arrangements in place to provide for continuity or reimbursement in the event of insolvency, and consumers to have access to the FSCS from day 1 of regulation. Consumers will also have access to the ombudsman service for complaints, including those relating to acts or omissions that took place before FCA regulation, where the provider was a member of the Funeral Planning Authority at the relevant time.

How we can help

Please get in touch with Jeanette or your usual WM contact if you need more details or have queries arising from any of the points covered in this briefing, or require advice or assistance with any regulatory or compliance issue.