FCA confirms regulatory approach for pre-paid funeral plans

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FCA confirms approach for pre-paid funeral plans

Pre-paid funeral plans can be large financial purchases that affect vulnerable customers and can be difficult for customers to understand.

After the decision to bring funeral plan providers under regulation, which we discussed in our previous article, the FCA has now come out with further guidance on what this will look like.

What we know so far

Following a consultation on the FCA’s proposed approach to funeral plan regulation in March 2021, the FCA confirmed that measures will be in place from 29 July 2022. The regulation aims to ensure that funeral plan providers achieve good consumer outcomes by meeting their needs and offering fair value.

These rules relate to both providers (firms who enter into/carry out funeral plan contracts) and intermediaries (firms who advise or arrange the purchase of funeral plan contracts). Both must apply for FCA authorisation or become an appointed representative (AR) before the rules come into force, and they will need to prepare to follow the FCA’s new rules. Those who are not authorised will have to cease funeral plan activities after this date.

The FCA also launched a further consultation (CP21/20) to confirm details on the resolution of firms, protection under the Financial Services Compensation Scheme (FSCS), and certain structural provisions. This consultation is open until 31 August 2021, and the FCA aims to finalise provisions by the end of 2021.

It is vital for firms who wish to continue trading in funeral plans to become familiar with the new regulations and seek authorisation in advance of the deadline.

What standards should firms put in place?

Products must meet consumer needs

A ban on products that do not provide funeral services (in almost all circumstances).

Plans must be sold fairly

Products must be consistent with consumer demands and needs and enhanced disclosure requirements, with a ban on cold-calling.

Products must represent fair value

A ban on commission payments to intermediaries and further requirements on remuneration and fees.

Improve governance standards and oversight 

Application of the Senior Managers and Certification Regime (SM&CR), systems and controls, appointed representatives, risk management and outsourcing.

Ensure services can be delivered 

Requirements to back plans with trust or insurance, systems and controls rules on pricing, and prudential requirements to hold capital.

Backstops in place should things go wrong

Continuity or reimbursement plans in case of failure, access to the FSCS and Financial Ombudsman service.

Key confirmed regulations

The FCA has confirmed these regulations will be in place from 29 July 2022. In response to consultation feedback, some of the original proposals have been adjusted as detailed below:

High-Level Standards

Funeral plan providers will be required to adhere to FCA high-level standards, such as the requirement for employees to have at least 15 hours of training per year. The FCA is also consulting on a new Consumer Duty, which will come into force by 31 July 2022.

Commission

Commission payments to intermediaries will be banned.

Instalment plans

Funeral plans sold on instalment plans must guarantee a funeral without additional payment at the time of death but with allowance for a moratorium period of 24 months during which firms will not be required to deliver the funeral.

Risk Transfer and Prudential

To ensure that funeral plans on instalment will deliver, firms will be required to place in a trust or insurance sufficient sums for the purpose of providing the agreed funeral. Firms should have systems and controls in place to ensure the adequacy of trust and insurance arrangements.

Money handling

Monies paid by consumers for funeral plans should be paid into the trust or to the insurer as soon as possible upon receipt. Intermediaries will only be allowed to handle payments in limited circumstances, to allow consumers to pay in cash if they need to.

AR and Approved Persons

Intermediaries can seek to become ARs of a regulated funeral plan provider. The FCA has dropped the requirement for ARs to hold a customer function Approved Person (CF30), which may have been disproportionate for smaller intermediaries.

Annual statements

Annual statements should be sent to customers every three years (as opposed to every year, which was proposed originally).

Cancellation rights

Customers must have a 30-day free cancellation window, as well as a further 7-day period to cancel free of charge after a funeral service provider is confirmed.

What do firms need to do ahead of 29 July 2022?

  • Review existing systems and controls
    • Firms that will become regulated should conduct a thorough review of their governance structure, product governance, and systems and controls against the FCA requirements which will come into place.
  • Apply for authorisation
    • Firms that wish to continue selling funeral plans must apply for FCA authorisation – applications will open for submission on the Connect system from 1 September 2021. The authorisation process usually takes up to 6 months.
  • Intermediaries need to evaluate their business activities to determine what regulatory status would be required
    • Firms that currently sell funeral plans should assess the scope and cost of their business activities to consider whether they should be regulated, an AR, or an Introducer Appointed Representative (IAR).
  • Keep up to date on regulatory developments
    • As the FCA is consulting on further regulations for funeral plan providers (in CP21/20), firms can familiarise themselves with these proposals and provide feedback to the FCA. Firms should remain aware of these final regulations, which will be confirmed by the end of 2021.