Funeral Plan Regulation
In March 2021, the FCA launched a consultation on its proposals for regulating the pre-paid funeral plan sector set out in CP 21/4.
The FCA proposed in this CP that the provision and distribution of pre-paid funeral plans in the UK should come under FCA regulation from 29 July 2022. (The sector is currently regulated, on a voluntary basis, by the Funeral Planning Authority.)
The FCA’s proposals affect:
- Firms selling or carrying out funeral plan contracts for funerals in the UK,
- Investment advisers providing advice on funeral plan contracts,
- Insurance firms providing life insurance policies backing funeral plans,
- Trustees of trusts and discretionary investment managers managing the assets of trusts backing funeral plans, and
- Firms unable to continue administering existing contracts, who will be required to cease all activities in relation to funeral plans.
With the consultation now closed, the FCA considered the feedback received and published its final rules in a Policy Statement, PS 21/8, issued in July 2021.
The key points for in scope firms are as follows:
- 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 firms that have assumed the obligation to provide (or secure the provision of) a funeral as a result of the novation, assignment, or transfer of an existing funeral plan contract. This means that, where books of funeral plans are sold, the entity buying them will be carrying out those funeral plan contracts as the provider and will require FCA authorisation.
- Funeral plans entered into by local authorities, or where the customer and plan provider intend or expect the funeral to occur within one month of the sale, or which provide only for funerals outside the UK, will fall outside of the scope of FCA regulation.
- FCA wants to see better-value products, better sales practices, and better controls in place, so consumers can be confident of receiving the funeral they have agreed to. The FCA believes improvements must be made, given that the Treasury’s Call for Evidence in June 2018 found significant consumer harm in the market, including the mis-selling of products, poor disclosure, and high upfront costs. Previous consumer research and the FCA’s own evidence-gathering supported these findings and identified additional potential harms around longer-term instalment plans and the risk of funeral plans failing to deliver the consumer’s funeral.
The FCA has proposed the following:
- Because products must meet consumer needs, the sale of those that do not provide for funeral services in all circumstances on the consumer’s death will be banned.
- Because products must represent fair value, plan providers will be required to ensure that their funeral plans are intended to provide this. Responsibility for fair value will sit with the firm’s governing body. The FCA expects firms to monitor pricing to ensure that products are economically viable.
- Funeral plan firms will be required 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 their activities and increasing with size.
- Funeral plan providers should continue to back plans with appropriate trust or insurance arrangements. These arrangements must be adequate to deliver services in line with consumers’ expectations.
- Funeral plan providers must have robust trust arrangements in place. Trusts must be established by written instrument, with a majority of independent trustees, an independent fund manager, and annual accounts prepared by a statutory auditor.
- Intermediaries may not hold monies paid by consumers for funeral plans.
- Plan providers must arrange for a solvency assessment report to be produced annually by an actuary. This must calculate and verify the trust’s assets and liabilities and must provide information on its solvency status on a best-estimate basis. This applies to all plans, including those entered into before 29 July 2022. Where a solvency assessment report shows that a trust has fallen into deficit, funeral plan providers must draw up a remediation plan for the shortfall. If the trust remains below the required minimum solvency level after the term of the plan ends, the provider must rectify any shortfall from its own resources.
- Funeral plan firms must comply with prescribed standards of conduct, including acting honestly, fairly, and professionally in accordance with the best interests of their customers, and ensuring that funerals are provided, to a satisfactory standard, in line with plans.
- The Senior Managers and Certification Regime will apply to funeral plan firms. Most will be seen as Core firms for this purpose and will be subject to SM&CR and the Code of Conduct.
- The Appointed Representative (AR) regime will be extended to distributors appointed by funeral plan firms. Principal firms will be required to notify the FCA of significant changes in relation to their Ars.
- Recognising that existing contracts may have been sold on different terms to those now proposed, the FCA will generally allow these to continue on existing terms.
- The payment of commission to distributors will be banned from 29 July 2022. Distributors must be remunerated for their activities by customers only, and their fees must be consistent with the duty to act in the customer’s best interests.
- Funeral plans will be brought within scope of the financial promotions regime. This means firms must ensure they communicate in a way that is clear, fair and not misleading, and must keep a record of promotions they communicate or approve.
- Funeral plan firms must set out clearly the scope of the services they offer and must provide key information about their products and fees to customers and their nominated representatives in two short standalone documents.
- Cold calling by all firms involved in funeral plans will be banned. Firms will be able to contact customers or potential customers only for the purposes of interactive marketing (e.g. by phone or in person) where there is already an established client relationship.
- Funeral plan firms must limit the products they propose to customers to those they assess as being consistent with the customer’s demands and needs.
- Funeral plan firms that provide personal recommendations on funeral plan contracts must ensure that the product they recommend is the one that best meets the customer’s needs, based on a fair and personal analysis of the funeral plans market.
- All funeral plans should include a 30-day period after purchase, during which customers can cancel their plan without penalty and receive a full refund.
- All fees charged by funeral plan firms should reflect only the costs incurred and must not include a profit element.
- Plan providers must nominate a funeral director within a reasonable distance of the customer’s home and must notify the customer within 30 days of purchase. They must put contractual arrangements in place to ensure that funeral directors will deliver funerals as set out in customers’ plans, without any additional payment from them or their estates. Providers must review their arrangements with funeral directors regularly to ensure this will happen, with FCA guidance indicating reviews be carried out at least once a year.
- Funeral plan providers must send a letter to the customer’s representative within five business days of a funeral plan being taken out to ensure the customer’s representative is aware of the plan, what it covers, and the procedure for making a claim following the customer’s death.
- To address the problem of ‘orphan plans’, funeral plan providers must send customers an annual letter detailing key information on their funeral plans, including their features, payments, and cancellation terms, and the complaints process.
- Providers must handle the redemption of funeral plans fairly and promptly, and must retain full responsibility for ensuring delivery of the plan, even where services have been sub-contracted
- Product governance rules will be applied to all firms in the funeral plan sector. This means firms will need systems and controls in place for the design, approval, marketing, and ongoing 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. These rules will apply to existing products, as well as to new products. Where products do not meet these requirements, firms will need to take remedial action to improve the quality of the product, amend the distribution strategy, or cease offering them for distribution.
- For new contracts, and for those entered into prior to 29 July 2022, firms must have a resolution manual in place to help resolve their business should they fail. Consumers should be able to receive prompt reimbursement if a failed firm attempts to transfer its obligations to another provider or is unable to continue meeting them itself. (The FCA plans to issue a further consultation later this year on its proposed rules for reimbursement amounts and funding).
- A framework will be introduced enabling the FSCS to compensate customers of failed firms that are unable to meet their liabilities.
- To ensure complaints are dealt with promptly, consistently, and fairly, the complaints-handling requirements in the FCA’s Dispute Resolution: Complaints sourcebook will apply to funeral plan firms. This means firms will be subject to prescribed rules on complaints handling and complaints resolution – and to reporting and record-keeping requirements.
- Where plans provide for funerals in the UK, plan providers will be brought within the compulsory jurisdiction of the Financial Ombudsman Service.
- Funeral plan providers must report important data on their sales activity to the FCA every three months, prudential information every six months, and data on complaints every twelve months. Funeral plan intermediaries must report important prudential data every six months and complaints data annually.
All firms in the funeral plan sector need to consider how the FCA’s proposed rules will impact their businesses, and to make the necessary preparations.
Funeral plan firms need to:
- Apply directly to the FCA for authorisation from 1 September 2021, or submit a notification to become an appointed representative,
- Apply as soon as possible after the application gateway opens in September. (Applications made after 1 November 2021 will incur a 40% higher application fee), and
- Ensure they meet the FCA’s standards for authorisation and thereafter follow the FCA’s rules.
The fee structure will be as follows;
- Standard charges for authorisation:
– Intermediaries (i.e. firms carrying out FP distribution): £2,500
– Administrators (i.e. providers restricted to carrying out FP contracts, but not to enter into contracts) – £2,500,
– Providers (i.e. these both carry out and enter into FP contracts): £10,000
- An uplift of these charges by 40%, to £3,500 and £14,000, respectively for firms that apply for authorisation late. The enhanced charges would apply to firms which are trading when the gateway opens on 1 September 2021 and which submit their applications after 1 November 2021. New applicants would not be affected.
- Concerning variations of permission (VoP) applications, an intermediary or administrator applying for the full FP provider permission would pay £5,000, while an intermediary applying to be an administrator would pay £1,250. Other FP VoPs would pay the standard charge of £500.
- Concerning fees, FP firms with incomes up to £100,000 will pay only a minimum fee in fee-block A.0, which is currently set at £1,151. Larger firms will pay a variable rate fee on their incomes above £100,000, on top of the minimum charge and an uplift in fee-block AP.0 (currently £0.1055) to contribute towards their prudential regulation.
- There will be an annual charge of £250 on each appointed representative for which a principal firm is responsible. The FCA has decided to proceed with the charge for 2021/22, although with a lower rate of £75 for introducer ARs. It will consult in its fees policy CP in October or November 2021 and consider whether to extend this charge to FP firms when they start paying fees from 2022/23.
Funeral plan firms that cannot meet the FCA’s standards, as set out in CP21/4 and PS21/8, and those not authorised before 29 July 2022, must cease trading in relation to funeral plans, in an orderly way. Carrying on regulated business without authorisation after the new rules take effect will constitute a criminal offence. Firms that do not intend to apply for authorisation or become an appointed representative should notify the FCA.
Applications will be made via the FCA’s Connect system. The FCA plans to open the Connect gateway for applications from 1 September 2021. It is important that firms submit their applications and supporting documents as soon as possible after this.
Funeral plan firms must ensure they give themselves sufficient time to demonstrate that they meet the FCA’s Threshold Conditions (the minimum standards for becoming authorised) before regulation begins on 29 July 2022. They must also make sure they familiarise themselves with the draft application form. The completed application should answer all questions as accurately and thoroughly as possible and should be accompanied by all the supporting documents requested. This will help the FCA process the application as quickly as possible.
When they apply, firms should be able to evidence that:
- They have the systems in place to meet the FCA’s standards (it is unlikely the FCA will consider a firm ‘ready’ if it plans to make systems changes that will not have been completed by July 2022), and
- They meet the Threshold Conditions (plans on how they intend to do so in the future will not be sufficient).
Firms should check their applications carefully before they submit them. If substantive changes are made after submission, which could indicate that the firm is not ready, willing and organised, the FCA may ask a firm to consider withdrawing the application and re-applying. While this will give firms an opportunity to address the issues raised, it could mean they will not be authorised by 29 July 2022.
Once the FCA has received an application, it will determine whether or not to authorise the firm that has submitted it. The regulator will assess applications on a case-by-case basis. If necessary, it will ask firms for more information to help them decide whether they meet the standards for authorisation. If firms cannot demonstrate that they meet the Threshold Conditions, they will be refused authorisation.
If firms submit a good-quality, detailed application, this process may take up to six months. If the application is incomplete, the process will take longer. If a firm has not been authorised by 29 July 2022, it will have to stop selling and administering funeral plans until its application for authorisation has been approved.
The FCA will communicate with applicant firms throughout the authorisation process. If firms have any questions about preparing or submitting their application, they can email firstname.lastname@example.org.
For more information on how we can help you with your funeral plan regulation arrangements, or with any other aspect of FCA compliance, our expert team is here to help. Contact us today on 0207 436 0630 or email email@example.com.