Under a pre-paid funeral plan, an individual can pay for their funeral upfront or in manageable instalments. Such plans are typically sold by a specialist provider or a third-party intermediary such as a will writer or funeral director.
In accordance with the FCA's objective to protect consumers and maintain market integrity, regulation in this area is intended to ensure that:
- Firms offer plans at fair value and which meet consumer needs;
- Firms are properly run, adhere to high standards of conduct, have sufficient resources and risk transfer arrangements in order to deliver funeral services; and
- Consumers are provided with the information that they need in order to make an informed decision when choosing between products and establishing whether a funeral plan is right for them.
The FCA intends to introduce measures such as the banning of cold calling and all commission payments to intermediaries.
Firms providing or arranging pre-paid funeral plans are now applying for authorisation from the FCA in order to continue to sell new plans or manage existing plans. The FCA has sent a clear message that firms who fail to demonstrate compliance with its standards, will not be authorised.
What has led to regulation in this area?
There has been a growing demand for funeral plans in recent years, bringing the conduct of firms into the spotlight. A consultation process launched by HM Treasury in 2019 resulted in the identification of several risks in the practices of firms such as:
- Funeral plans were being offered to consumers which did not meet their needs or expectations. For example, a consumer could set up a payment instalment plan without guarantee of a funeral service.
- Providers/ intermediaries would deploy high-pressure sales tactics which included cold calling potentially vulnerable consumers. This led to consumers taking out plans which were unsuitable.
- Consumers were paying high prices for a product as a result of high rates of commission and fees.
- Internal controls and governance within plan providers extending to oversight of intermediaries and potential conflicts of interest arising from high commission rates were generally deemed to be poor.
- Funeral plans were going unclaimed owing to a lack of family awareness. Families were unable to use plans which they had later discovered.
- The financial management of trusts was poor and meant that sufficient funds may not have been available to cover funeral costs resulting in unclear and potentially poor outcomes for consumers should the firm fail.
In light of these concerns and following the passing of legislation, the FCA has sought to create rules which aim to protect consumers from poor conduct by providers and intermediaries, and in the event that their funeral plan provider fails. Early evidence suggests the FCA has particular concerns about the (non-insurance) trust structures underlying many funeral plans and the management and use made of those trust monies.
What does this mean for firms?
The FCA has indicated that applications received from February 2022 are unlikely to be approved for authorisation by 29 July 2022 and that those firms will have to cease trading until the application has been assessed. Firms which continue with such services without authorisation will be committing a criminal offence, unless exempt.
From 29 July 2022, authorised firms will be expected to comply with the FCA's new rules and sourcebook - Funeral Plans: Conduct of Business ("FPCOB"). Firms should consider the impact of the new rules/ guidance upon their business and conduct a thorough review (and, inevitably, upgrade) of existing policies and procedures.
Firms operating in this area will need to ensure that the relevant prescribed responsibilities are appropriately allocated to senior managers, that both senior managers and staff are aware of their responsibilities and receive appropriate training on the new rules to ensure compliance with the Senior Managers & Certification Regime ("SMCR").
Whilst this process may appear straight forward, it is clear from the FCA's announcements – and based on our experience - that it shall not hesitate in blocking firms who fail to meet its prescribed standards from becoming authorised in the first place. In its press release about funeral plan regulation, the FCA's Sheldon Mills, Executive Director, Consumers and Competition said: "As we take over the regulation for this market, we will be rigorously assessing firm’s fitness to operate. Firms must now plan for this new regulatory regime or prepare to leave the market in an orderly manner."
We are already aware of significant regulatory action involving contested authorisations, with FCA injunctions and even possible prosecutions, as well as enforcement investigations into some of those that obtain authorisation, to follow. Given its rhetoric on individual accountability, the FCA is also unlikely to hesitate in taking action against senior managers where it considers there is evidence of senior management failings.
The FCA has a webpage with firm-specific information about applications that have been withdrawn (or refused, but with the firm allowed to withdraw on receipt of a 'minded to refuse' letter) and those firms that have transferred their plans to other providers (presumably instead of staying in business and obtaining authorisation); this is a useful reference point for those applying for authorisation in the sector.
How we can help
The FCA's approach to authorisation of a whole sub-sector is not new; having been used for consumer credit and claims management company ("CMC") authorisations when those industries came within the FCA's perimeter, as well as more recent crypto exchange registrations under the FCA's money laundering regulations jurisdiction. No longer will the FCA 'grandfather' firms across and then rely on supervisory and enforcement work to weed out the bad actors.
The FCA is intent of stopping its enemies at the gate. DWF has substantial experience in navigating firms through the complex regulatory landscape, assisting with compliant authorisation applications, devising appropriate systems and controls in order to meet the FCA's expectations and minimise risk and, if required, dealing with regulatory litigation resulting from contested authorisation cases.
Those wishing to know more should contact any member of our Financial Services Regulatory team.