On 2 March 2021, the FCA published a consultation paper explaining their proposals for the regulation of the pre-paid funeral plans sector (the Consultation).
The Consultation had been commissioned after the Treasury’s Call for Evidence in June 2018 found “significant customer harm” in the market including the mis-selling of products, poor disclosure and high upfront costs.
What is to be regulated?
Under the proposals outlined in the Consultation, activities involving the provision and distribution of pre-paid funeral plans will fall within the FCA’s regulatory perimeter from 29 July 2022, with firms conducting those activities requiring FCA authorisation from that time.
The primary regulated activities relating to funeral plan contracts will include:
- entering into funeral plan contracts as provider; and
- carrying out (or administering) funeral plan contracts as provider.
A funeral plan provider, for these purposes, will include any person to whom one or more payments are made under the contract. This definition therefore captures any person who has assumed the undertaking to provide, or secure the provision of, a funeral as a result of a novation or assignment meaning that where books of funeral plans are sold, the entity that buys them will also be deemed to be carrying out those funeral plan contracts as provider and require FCA authorisation.
In addition, the removal of the existing exclusions for trust and insurance-backed plans means that other specified activities will also become regulated when carried out in relation to funeral plan contracts, including dealing in funeral plans as agent, arranging (bringing about) funeral plans, making arrangements with a view to funeral plans and advising on funeral plans.
As well as extending the regulated activity perimeter, the proposed legislation also means that firms advertising funeral plans or related services are likely to be captured by the UK’s financial promotions regime. Financial promotions can only be lawfully communicated if (i) they are communicated by an authorised person; (ii) the content is approved by an authorised person; or (iii) a relevant exemption applies. Although FCA regulation will not apply directly to the activities of funeral directors in providing the eventual funeral service.
Wider regulatory architecture
The Consultation sets out further details on the wider regulatory architecture which will govern the provision of funeral plans going forward. These include rules and requirements relating to:
- prudential standards - firms will be expected to satisfy a general solvency requirement and core capital resources requirement which are proportionate to the size of the firm’s funeral plan business;
- conduct of business rules – providers must, among other requirements, comply with the customer’s best interests rule, produce clear product summary documents, design products that meet the needs of a clearly defined target market and select appropriate distribution channels. Distributors are prohibited from receiving commission or any other remuneration for their distribution services other than fees paid directly by customers and must provide customers with clear information about the features of the plans which they distribute;
- regulatory reporting – firms will be subject to periodic FCA reporting requirements (e.g. concerning complaints, conduct breaches, prudential data and changes in business);
- appointed representative rules – firms will be subject to the appointed representative rules with regards to any distributor appointed as such, including the need to have a written contract in place and to take responsibility for the representative’s actions in the regulated space;
- distributor commission – the new rules restrict commission payable to funeral plan distributors;
- Financial Services Compensation Scheme (FSCS) – the government and FCA are considering expanding the FSCS to compensate customers of failed firms which cannot meet liabilities against them;
- Financial Ombudsman Service (FOS) – the new rules include provisions on when complaints relating to funeral plans must be referred to the FOS; and
- the Senior Managers and Certification Regime (SM&CR) – the FCA is proposing to treat funeral plan firms (that have no other regulatory permissions) as Core SM&CR firms, except for intermediaries whose primary business is not funeral plan intermediation and who only have permission to carry on funeral plan mediation activity, which would be classed as Limited Scope firms.
The FCA is hopeful that this regulatory architecture will create better outcomes for funeral plan customers, many of whom would be classified as vulnerable.
Next steps
The gateway for authorisation applications is expected to open in September 2021 and firms will need to ensure that they are authorised before the new rules take effect on 29 July 2022. The FCA has asked any firms requesting authorisation to submit applications before 1 November 2022, with any applications after that date potentially incurring late application fees. Any appointed representative notifications are to be submitted once the principal firm has been authorised.
Firms which do not intend to be authorised must cease their regulated activities and wind down/sell their book prior to 29 July 2022.
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