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Funeral plan providers – how to prepare for regulation

Nigel Morrison Nigel Morrison

Funeral plan providers, and firms selling pre-paid funeral plans, will shortly need to be authorised in order to continue operating. Nigel Morrison assesses the impact of the new rules and how to ensure a smooth transition.

From 29 July 2022, funeral plan providers and intermediaries are to be regulated by the Financial Conduct Authority (FCA), following a consultation published in March 2022. Regulation will be a big step for many providers, with firms set to go through a period of significant adjustment. Both careful management of working capital and prudent forecasting will be essential to a smooth transition.

Pre-paid funeral plans under scrutiny

In the UK there are around 1.6 million customers of funeral plan providers, with 200,000 funeral plans taken out every year.

In the FCA's consultation published in March 2021, the regulator outlined its concerns that many plans didn't meet consumers needs or offer fair value. Firms used unfair and high pressures practices such as cold-calling consumers. There is also poor governance and controls within firms, including oversight of intermediaries and potential conflicts of interest where an intermediary gets a high commission.

The failure of Safe Hands Funeral Plans in March 2022 has served to highlight regulator concerns. Safe Hands fell into administration with insufficient funds to meet the funeral costs of all its customers.

Regulatory requirements for funeral plan providers

Once regulated, the FCA rules aim to protect customers if their regulated funeral plan provider fails. The rules also cover the resolution of funeral plan firms; trust and insurance arrangements; and provides access to the Financial Services Compensation Scheme (FSCS) for consumers.

Firms will need to:

  • minimise the harm to customers arising from the failure of a regulated funeral plan provider and protect customers’ interests upon insolvency
  • ensure that if regulated funeral plan providers fail that it happens in an orderly way
  • ensure that contracts can be transferred to another regulated funeral plan provider where possible
  • ensure the FSCS can arrange continuity of funeral plan contracts or pay appropriate compensation if the regulated funeral plan provider is declared ‘in default’ by the FSCS
  • mitigate any undue impact on FSCS levy payers

Wind-down planning requirements

Funeral plan providers will also be required to put a comprehensive wind-down plan (WDP) in place. This should include how a firm would wind down in both solvent and insolvent scenarios, and address:

  • funding to cover the solvent wind down of the firm, including the return of all customer funds where a transfer of funeral- plan contracts to an alternative provider can't be arranged
  • realistic triggers for a solvent wind down – considering time required to transfer to alternative funeral providers
  • realistic triggers to seek advice on entering an insolvency process

The FCA is proactive in reviewing WDPs. It has recently published its observations on wind-down planning, stating that many plans don't meet expectations and are not “credible and operable”. Common failings include firms not adequately considering liquidity and cashflow modelling, intra-group dependency and wind-down trigger calibration. Funeral plan providers must carefully address these issues in their WDPs.

Additional SM&CR and Consumer Duty requirements

The Senior Managers and Certification Regime (SM&CR) will apply to all directly authorised funeral plan firms. The regime is a set of rules and guidance that sets standards relating to professionalism, conduct and governance, and holds senior members of a firm to account. Senior managers must be aware of their responsibilities, and staff must be adequately trained on the rules set out in the Funeral Plan – Conduct of Business (FPCOB) sourcebook.

The FCA’s Consumer Duty rules (final rules expected July 2022) require regulated firms to focus on ‘fair value’ and ‘good outcomes’ for their consumers. ‘Outcome’ is different to ‘customer journey’ – each consumer may need a different level of service in order to achieve what the FCA would define as a good outcome. Firms will need to monitor and measure outcomes on an ongoing basis. Many consumers of funeral plan providers will also qualify as vulnerable, and firms will need to ensure that they comply with FCA rules around vulnerability.

This emphasis on consumer outcomes will take significant time and resource to put in place. For many firms, it will also require a shift in focus.

Risk of redress

Once under FCA regulation, customers of funeral plan providers will be able to refer complaints to the Financial Ombudsman Service (FOS). Firms must be aware that claims management companies (CMCs) may start to focus on the sector, as they have done in the high-cost short-term lending and insurance sectors. This has the potential to considerably increase the number of complaints brought against a firm.

The consequences of claims against a funeral plan provider are much wider than any redress payments. The cost involved in the claims management process – including training and resource required to adjudicate those claims – can be significant. A claimant retains the right to be referred directly to the FOS, which brings an automatic £750 case fee, payable by the firm, regardless of the outcome.

Funeral plan providers need to consider how coming under the FOS's remit will increase complaint volumes. They need to include the related costs in their forecasts to understand what impact this could have on their cashflow.

Working capital management and cashflow forecasting

The fixed overheads of regulation will have a significant impact on many businesses. Firms need to have appropriate cashflow forecasting models in place to fully understand a firm’s resilience in different scenarios. This will also aid in identifying triggers that may lead to a firm’s underperformance.

For example:

Will the FCA fair value requirements within the Consumer Duty rules challenge a firm’s present pricing models?

The new rules state that administration and cancellation fees must not be profit drivers, and ban commission payments to intermediaries. What will the consequences be for firms who make a significant proportion of their revenue stream from these sources?

Do firms have clarity on how the ban on cold calling will affect revenue streams?

Regulation is a big step for any sector. In the period of adjustment there will be both winners and losers. However, ultimately regulation aims to improve the financial resilience of firms and ensure customers receive better outcomes.

For more information on this topic, contact Nigel Morrison.

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