Upcoming FCA Regulation of Pre-Paid Funeral Plans

With a recent substantial rise in funeral costs, the Government’s new legislation will bring pre-paid funeral plans under the regulation of the Financial Conduct Authority from 29 July 2022, which aims to ensure that consumers of funeral plans receive a consistent service across the market.

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Funeral costs have increased significantly over the previous ten years. Sun Life has calculated the ‘average cost of dying’ – or the total cost of a person’s funeral including fees, service and optional extras such as a wake – to be £9263, representing a rise of 39% in the last decade. Even a basic funeral in the UK now costs £4184. It isn’t hard to see why a pre-paid funeral plan is seen by many as a potentially ‘safe’ option – choosing the details and paying upfront to avoid leaving loved ones with the bill. But this also highlights some of the pitfalls. There is a lot of scope for misunderstanding, particularly if details on the pre-paid package are not clear, then family members can be under the impression that something has been included when it was never under the original plan.

The FCA will regulate pre-paid funeral plans from July 2022, and is currently consulting on its draft rules and guidance for the funeral plans sector.

Unsurprisingly, the FCA has signalled that the aim of much of its rules and guidance will be to make the market more transparent, to support and protect vulnerable consumers – which are likely to make up a significant proportion of the customer base – and improve sales practices. The ultimate aim, say the FCA, is to ensure that consumers can be confident that they will receive the funeral they have agreed with the provider.

Best practice, regulator expectations and regulatory requirements have shifted at a significant pace over the previous five years, even for firms that have previously fallen under the FCA’s remit. The changing nature of regulation has been particularly challenging during the pandemic.

Funeral plan providers have just over a year to prepare for regulation. Some providers will have little or no experience of regulation, so preparing for authorisation is likely to feel daunting. There are a number of rules and requirements that the firm will need to ensure it abides by, from the Threshold Conditions – the minimum standards firms must meet to become and remain authorised by the FCA – to rules around systems and controls, conduct of business, prudential standards, complaints handling, and the Senior Managers and Certification Regime.

This isn’t an insurmountable task, however, and although smaller providers should be reminded that in general the FCA apply some rules and requirements in a proportionate manner, utilising all of the time available to prepare their application – and all of the supporting tasks such as process and procedure updating, training, etc – is more likely to lead to authorisation.

The consultation paper released by the FCA provides some very useful background reading for firms new to financial services regulation, particularly within the ‘high level standards’ section, which explains, in brief, the Principles for Businesses, provides the link for the FCA’s guidance on the fair treatment of vulnerable consumers, explains the threshold conditions, the basic requirements of SYSC – the systems and controls section of the Handbook – and the general provisions.

Chapter 4 of the consultation sets out the proposals for the proposed conduct of business sourcebook for funeral plan providers. There is a significant focus within these proposals on maintaining adequate financial resources, so that customers can be confident they will receive the funeral they have paid for, and that customers will receive redress or a refund on cancellation if required.

The new conduct rules will aim to raise standards across the board, and avoid customers buying unsuitable products, which will cover rules around the marketing of funeral plans, that plan providers must design products that meet the needs of the customer, not receive remuneration which would conflict with the duty to act in the customer’s best interests, not pay commission to distributors, regularly review their products, provide clear summary documents to customers which set out any exclusions or limitations for customers, send the customer an annual statement setting out key information about their plan, and nominate a local funeral director to carry out the funeral.

Commission is an element that the FCA are particularly focussed on, having found that while funeral directors themselves typically receive no or minimal commission, intermediaries that sell plans can receive up to £900, which the regulator does not think provides value for money for consumers.

Firms will also have a new set of obligations to report key information, events and changes to the FCA on a regular basis – or on an ad hoc basis, in the case of Senior Manager breaches of the Conduct Rules, for example. The FCA plan to apply the Supervision manual (SUP) rules to funeral plan providers, meaning that firms will be required to notify the FCA of significant changes, to report business data every three months in respect of sales activity, every six months for prudential information, and annually for complaints.

Now is the time to begin to prepare for authorisation - all funeral plan providers that wish to continue doing business will need to apply to the FCA or cease trading. The authorisations gateway for applications is planned to open in September 2021. In any case, all firms must ensure that they are authorised before 29 July 2022, bearing in mind that applications for authorisation can take at least six months.

We offer a FCA Advice and Application Support service, offering guidance, support and creation of documents and procedures to assist firms to pass through the authorisation process quickly. Further information about this service can be found here. To contact us to discuss this, contact Rob Bell at robert.bell@rbcompliance.co.uk.