FCA sets out Final Rules for Regulated Funeral Plans

On 5 July 2021, the Financial Conduct Authority (FCA) launched a consultation (CP21/20) on its proposals for regulation of the pre-paid funeral plan sector. This follows the consultation that was launched earlier in March this year and is part of an extensive regulatory change in the pre-paid funeral plan market.Under the proposals, activities involving the provision and distribution of pre-paid funeral plans will come under FCA regulation from 29 July 2022.

All businesses in the pre-paid funeral plan market should be taking steps now to check how the new rules and regulations affect them and what steps are required to ensure the business is compliant with the new FCA rules and regulations.

1. Does this apply to you?                                                          The proposals apply to:

• Providers: firms that enter into funeral plan contracts with consumers and/or which carry out funeral plan contracts that have previously been agreed (including in relation to plans that were sold prior to the new rules becoming effective).
• Intermediaries: firms that advise customers on funeral plan contracts or arrange them for customers (this may include funeral directors and will writers).
• Insurance firms: firms that provide life insurance policies that back some funeral plans.
• Trustees and Discretionary Investment Managers: where the role is carried on in relation to trusts that back some funeral plans.
• Trade bodies: that represent firms that carry out or sell funeral plan contracts.

2. What do these rules mean for your business?                   These rules mean:

• Funeral instalment plan products must always deliver a funeral (after a moratorium period) as the FCA will be banning those that do not guarantee this.
• Cold calling will be banned and new standards on advertising will be implemented to ensure plans are sold fairly.
• Commission payments to intermediaries will be banned to ensure products represent fair value.
• Those selling funeral plans are subject to full checks on their fitness to operate to improve governance standards and oversight.
• Funeral plan providers will need to ensure that the contracts of insurance that are used to back a funeral plan are compliant with the new requirements in the Funeral Plans Conduct of Business Sourcebook (FPCOB), in particular that they do not terminate upon the failure of the regulated funeral plan provider.

Resolution of firms

• One of the key issues for the FCA is protecting consumers in circumstances where funeral plan providers fail.  Firms are required to ensure that plans can be transferred in the event of the provider failing.
• Funeral plan providers must have arrangements in place to reimburse amounts to customers upon insolvency, where a transfer of funeral plan contracts to an alternative provider cannot be arranged. However, the FCA has not specified the value of the required reimbursement. It will be for the appointed insolvency practitioner to account for this liability in the course of carrying out its functions in the insolvency process. Firms will be required to ensure that relevant funeral plan contracts provide that, if the firm fails, the firm will be obliged to take all necessary steps to ensure that the customer, covered individual or (on the covered individual’s death) the covered individual’s next of kin will be repaid any amounts which they are due from the relevant trust or contract of insurance sitting behind the funeral plan contract. A clause to this effect must be included in the relevant contracts.
• Regulated funeral plan providers will also need to ensure there are no terms in the funeral plan contract that limit liability, or which would limit customers’ claims upon insolvency, including via the FSCS (Financial Services Compensation Scheme). The FCA’s position is that such clauses are unlikely to meet the fairness test in the Consumer Rights Act 2015 in any event.

FSCS protection

• The government has launched a consultation on proposed legislation that would enable the FCA to implement rules to allow the FSCS to arrange continuity of funeral plan contracts and to also supplement the FSCS’s ability to seek recoveries from insurance policies or trust assets (which underpin the funeral plan arrangements) in the event of a regulated funeral plan provider failure.

Additional proposals

• There is an additional obligation for firms to notify customers and their nominated representative following a transfer of a firm’s funeral plan contracts within 30 days of a transfer of those contracts.
• Providers will be subject to ongoing reporting requirements to provide:
  • quarterly conduct returns
  • 6-monthly prudential returns
  • an annual complaints return
• Intermediaries will be subject to ongoing reporting requirements to provide:
  • 6-monthly prudential returns
  • an annual complaints return

3. What should you do now?

• If you undertake any of the activities discussed above and wish to continue doing so once the regulation comes into force in July 2022, you will need to apply for FCA authorisation or become an Appointed Representative (AR) of an authorised firm (principal).
• Firms should prepare now so that they can apply for authorisation as soon as possible after the application gateway opens in September 2021. For applications made after November 2021, the application fee will increase by 40%.
• Firms recommending specific funeral plans to customers are very likely to be advising the customers, and so should apply for FCA authorisation to “advise on investments” in relation to funeral plans.
• Any firms that are not authorised or do not become Appointed Representatives by 29 July 2022 will have to cease trading in relation to funeral plans. From 29 July 2022 it will be a criminal offence for plan providers to carry out funeral plan contracts without authorisation.
• If you know you will not apply for authorisation, withdraw your application for any reason, or have your application refused, by 29 July 2022, you should stop selling new funeral plans and must, before 29 July 2022, transfer your existing books of business or wind down in an orderly way.

4. How can we help?

If you have any queries in relation to the FCA’s final rules for regulated funeral plans, please contact Adam Edwards, Daniel Meyer or Harshini Andugulapati