FCA to regulate pre-paid funeral plans

The sale of pre-paid funeral plans is currently regulated by the Funeral Planning Authority (“FPA”), a self-regulatory body, rather than the Financial Conduct Authority (“FCA”). Due to concern about the potential risk to consumers within this sector, the UK government is intending to bring all pre-paid funeral plans within the role of the FCA. A call for evidence from HM Treasury seeks views and evidence on the merits of this proposal. At the same time, the Competition and Markets Authority (“CMA”) has launched a market study into the supply of funerals in the UK.

The FPA, a Community Interest Company, has 24 members, many of which are connected to the Co-Operative Group. In 2017, FPA providers sold over 207,000 new plans, representing around 245% growth in annual sales when compared with 2006 figures. They comprise around 95% of the market and have over 1.3 million undrawn plans, equating to approximately £4bn in assets under management.

Regulation of this area is currently very light.

Entering into a funeral plan contract as a provider is a specified kind of activity under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”). Under RAO Article 59, a ‘funeral plan contract’ means a contract under which a customer makes one or more payments to a provider, who undertakes to provide, or secure that another person provides, a funeral in the UK for the customer upon their death. Providers either invest these payments in a trust fund or take out a form of insurance against the life of the customer. This enables customers to pay for a funeral in advance and safeguard against inflation.

However, RAO Article 60 exempts providers from regulation where one of two criteria are met, either:

  • the funeral plan provider undertakes to secure that the customer’s money is applied towards a contract of whole life insurance on the life of the customer (or someone else for whom the funeral is to be provided). The whole life insurance contract must be effected and carried out by an authorised insurer; or
  • the funeral plan provider secures that the customer’s money will be held in trust for the purpose of providing the funeral. This trust must meet certain conditions, including being managed by an authorised fund manager and overseen by a Fellow of the Institute and Faculty of Actuaries and half of the trustees must be unconnected with the provider.

At present, the FCA consider that all funeral plan providers active within the market meet the exemption criteria specified in RAO Article 60. As such, no funeral plan provider is authorised or regulated by the FCA in relation to this activity. There is no involvement from the Prudential Regulation Authority, given that RAO Article 3 excludes funeral plan contracts from the definition of a contract of insurance, and there is no proposal to amend this definition.

Should the government proceed with its preferred approach of amending the RAO to include greater FCA regulation of the funeral plan sector, this would lead to the sector being brought within the scope of the Financial Ombudsman Service and the Financial Services Compensation Scheme. The Centre for Effective Dispute Resolution is the dispute resolution body for deadlocked complaints related to members of the FPA and their customers.  It would also bring pre-paid funeral plans within the FCA’s Treating Customers Fairly principles and Financial Promotions rules.

The government’s initial view is that bringing all funeral plan contracts into the scope of FCA regulation would be an effective, proportionate and targeted policy response, and requests views and evidence on this proposal.  Responses should be sent directly to David.Reeves@hmtreasury.gsi.gov.uk and funeralplans@hmtreasury.gsi.gov.uk.  It is possible FCA regulation could apply from a date in 2019.

Responses to the CMA consultation are due by 28 June 2018. An interim report will be published in six months, and a final report in a year’s time.

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