Deadly Serious – Regulating Funeral Plans

Background

In theory, the activity of entering into a funeral plan as provider was always regulated. But the Regulated Activities Order 2001 provided two exclusions from the scope of that rule which were so broad that they effectively swamped it, and so nobody has needed to be regulated. Those two exclusions depended upon the issue of the plan either tethered to a life assurance policy or to the performance of assets in a managed trust. The industry has an unofficial guardian, in the form of the Funeral Planning Association, but by no means all plan providers are affiliated to the FPA and many regard it as rather irrelevant. As with so many financial or quasi-financial products, the villains of the piece were often not the plan providers but the agents through whom they sold their plans and the lead generators who drummed up interest from the general public. Agents receive generous commissions, while lead generators sometimes prove to be gateways to less scrupulous providers.

The main problem is that the person who purchases the plan is, by definition, not there to see it carried into effect. If there are issues at the time of the funeral with whether all payments have been made, whether the mourners are expecting some other or extended service but have no idea of the small print etc., then this stores up a great deal of bad feeling at just about the most sensitive time for all concerned. Add to this that the cost of funerals is continuing to increase, many folk have made no provision for this cost to be covered and all of this allows them to be taken advantage of, and the industry was clearly crying out for formal regulation.

And if in doubt, of course, the function of regulation has to be thrown in the direction of the FCA, whether or not the Regulator has a clear and comprehensive understanding of the issues.

Important dates

First of all, there are two important dates to bear in mind. From 29 July 2022, any person who provides a funeral plan or arranges a funeral plan must be regulated by FCA (actually, mere arrangers will be allowed to be appointed representatives). In preparation for this, persons needing authorisation are to be invited to apply to FCA from 1 September 2021 (though do not rush down to your regulatory consultant just yet, as FCA still has to design and consult on the application forms to be used).

What will being regulated involve?

FCA is proposing that a firm in this sector that it regulates will need to operate and behave like any other regulated firm. For example:

• There will be a regulatory capital requirement;
• Senior management must be registered in accord with the senior managers regime;
• There will be a new set of regulations in a module called FPCOB, which addresses conduct issues for funeral plan providers; and
• Core concepts in the FCA Rules will apply, such as the need to treat customers fairly, and the requirement that communications with customers must be clear, fair and not misleading.

Many funeral plan providers already offer a service that answers to key “good conduct” premises, and the culture shift involved here should not be all that large. However, aspects of the proposed structure have not been well thought out and give cause for some concern. We will dwell on some of these here.

Regulatory capital

Let’s start here. The formula FCA suggests is that the funeral plan provider should maintain capital of the highest of:

• £20,000;
• 5% of annual turnover; or
• 5% of the multiple of (a) the number of plans outstanding from the last trading period and (b) the median plan price in that period.

It does not require superior skills with numbers to see that these three alternatives lead to very different figures. Incidentally, if turnover represents money actually received (which it usually does), then unpaid instalments on plans not paid for outright will complicate this arithmetic further still. Is the median plan price a reflection of the final contracted amount or merely of the actual sums received? Most regulated firms that are not required to calculate capital (often daily) by reference to regulatory or commercial risk can maintain a sum equal to 13 weeks’ expenditure. Why not offer this as a practical alternative here?

Trust structure changes

It is recognised that those providers currently using the (exempt) trust structure will want to continue to do so. Most of the regime at present has survived. That is to say:

• There must be a written trust instrument;
• At least half of the trustees must be independent of the plan provider;
• Assets in the trust must be subject to management by a regulated investment manager; and
• There has to be an annual audit.

The changes have to do with the actuarial function. The present regime requires the actuary to report every three years (at least), and the FCA’s new regime will make this an annual requirement.   However, the actuary has to be satisfied that the trust property will discharge 110% of the value of outstanding funerals. If not satisfied, he reports this to the FCA and the plan provider will need to make remedial arrangements to the FCA’s satisfaction. Arguably, this does not greatly increase the burden upon the plan provider (although the actuary makes more fees, of course). But there is a wrinkle the FCA has not anticipated with this, in view of its attitude to instalment plans…

Instalment Plans

…which is that these are, in almost all cases, to be at the plan provider’s risk. While it is true that these have been the cause of much difficulty under the present regime (if, for example, the deceased is not fully paid-up at date of death and the plan provider chases the mourners for the missing money at a most sensitive time), what the FCA proposes swings the pendulum too far back in the opposite direction.

Instalment plans are common – in fact, some providers use them exclusively or as their main product line. FCA’s view is that, with the exception of being able to cancel a plan less than 12 months old (and even there this will not be possible if death was non-natural), the plan provider is to be obliged to provide the funeral and to cover the cost of the missing instalments at its own expense. There can be no question of obtaining these moneys from the estate or the mourners. FCA’s commentary offers no clarity as to how the plan provider is supposed to make provision for this (suggesting that it is the plan provider’s problem, even if it leads to increased fees).

This blanket approach will not work, and it is to be hoped that FCA can be persuaded to back away from it. It creates an incentive for a plan purchaser deliberately not to make further payments after the first year (often of 7 or more). And if, as a result, plan providers are forced to withdraw instalment options, this will remove perhaps 75% of product value from the market, and will chiefly affect the poorest consumers, who are unable to finance a funeral other than by periodical payments.

Another thought that occurs is that if the plan provider knows that it is liable for the unpaid part of the cost of a funeral, it will decline to sell a long-term plan (instalments expected over many years) to a person who is unable to prove that, medically speaking, he or she has survival prospects for the whole of the term. While one can never see into the future where this is concerned, if the investor presents as a person with a known heart condition, or a physical condition such as emphysema or Parkinson’s which is known to be fatal in the end, the plan provider may decline to service the application or may charge disproportionately more for taking it on. And above all, this will require that health-related questions get asked as part of the business process, something that the insurance industry has been careful to shy away from.

This entire aspect needs to be reviewed from scratch.

Pre-sale information

FCA proposes that for a plan provider who merely sells the plan, without providing actual investment advice, the structure used for non-advised insurance distribution should apply. Meaning that the plan provider will present the customer with a “demands and needs” letter, that sets out in objective tone what need identified by the plan provider the plan satisfies. This is not actually a statement of the obvious (“you need a funeral plan because you will pass away one day, and something has to pay for the funeral…”). The letter will need to confirm why an instalment plan is preferable for the letter’s recipient to a single payment plan, for example.

Post-sale information

A commendable proposal is that there is to be a requirement to provide information to the plan purchaser and to his/her relatives (nominated by the purchaser). There is to be an annual statement provided to each, and the line of communication to the relevant relatives is very sensible as well, as these rather than the plan purchaser will be in focus at the time of the funeral itself. Now, given that there is a requirement for candid disclosure to the relatives (as well as the plan purchaser), could the FCA not use this as a basis for saying that the relatives have had fair disclosure of the state of the given (instalment) plan, so that they would therefore be aware at – indeed, well before – the time of the funeral that more moneys are due than have been paid?

Commission ban

Agent selling plans for the providers who retain them cannot continue to earn commission. FCA’s consideration of this industry has purported to identify this as being one of the principal evils that have impelled it towards regulation. Agents will need to operate self-financing businesses. It is not clear whether they can be placed by plan providers on some sort of contractual retainer, not linked to value or volume of product placed. But that model is unlikely to please the plan providers.

It remains to be seen whether agents, seeking to retain a role at some sort of price, are successful in persuading FCA to allow a basic form of commission to be payable, that more fairly reflects the value of the products sold and the effort expended.

FCA would presumably not object to a system where the agents charged fees directly to the clients, perhaps at one and the same time offering actual investment advice. One suspects that few, if any, of the agents serving the market today will be interested in this model. However, there is a chance for a new model to replace it, where institutions like the banks or building societies might add funeral planning to their suite of advisory services that sit alongside routine current and deposit account facilities.

Financial Ombudsman Scheme and FSCS

On the basis that the typical funeral plan purchaser will qualify as an eligible complainant under the FOS, complaints about funeral plan providers will now fall within the FOS jurisdiction. The regime will take some getting used to for firms not previously accustomed to their complaints processes being externally reviewed.

There are also proposals for aspects of the industry to be covered by the Financial Services Compensation Scheme (FSCS), which in principle applies where a failed investment firm has swallowed up its clients’ investments. There is some doubt as to the extent to which this might apply, though, and it seems that FCA proposes a further consultation.

An issue with the FSCS is that its awards have to be funded, and this is undertaken via a levy on affected firms, collected annually by FCA. Since this is something that current firms do not, of course, pay at all, it is liable to be a further strain on their finances going forward under the new regime.

Application to existing business

As a short summary, the business that firms have written to date, outside of regulation, stays substantially outside of regulation even after 29 July 2022 (thus, for example, whatever restrictions are agreed for instalment plans sold from that date onwards will not apply to existing instalment arrangements). However, FCA has clarified that it expects more general and high-level attributes of the new regulated system to apply to existing business: threshold conditions for regulation; treating customers fairly; and communication with plan holders and relatives, for example.

What is not covered

We would draw attention to two things, where clarification is needed. First, it is quite unclear how the new system will interact with funeral plans and arrangements sold via religious movements.   Secondly, there is no clarity offered on what, financially speaking, may be included in a funeral plan.   Under the current unregulated regime, it is clear from the Regulated Activities Order that the plan must only cover genuine funerary expenses. While that could include extras, these still need to be a part of the funeral itself. It is not clear that headstones are included, for example, since these tend for good reason to come along after the funeral/interment has taken place. It seems reasonable that headstones should be included, especially since these are expensive items. But what about catering costs? Some religious funerals are presented on the basis that a very large number of people attend and there is food (and in some cases, drink) laid on afterwards. What would be invidious about the cost of this being covered – or at least contributed to – by the plan purchaser arranging for this in advance as part of the plan?

Concluding remarks

There are thought to be about 40 funeral plan providers in the UK, with Co-op and Dignity being the two largest, and much larger than the competition. The proposals are liable to limit the competition, because many smaller providers will either have to consolidate or cease business. Nor does this present a basis for new entrants. The effect of these proposals, as now presented, is to restrict rather than promote competition, and that is contrary to one of FCA’s core statutory objectives. The need for regulation is not disputed – least of all by the major players in the industry – but aspects of the present proposals are so at odds with the way that this industry needs to run, that the FCA really does need to look at these before its zeal in stamping out malpractice and poor sales technique damages the current industry possibly beyond repair.