From 29 July 2022, the Financial Conduct Authority (“FCA”) will begin regulating the pre-paid funeral plan sector, at which point firms operating in the sector will need to be authorised by the FCA or cease to manufacture or distribute funeral plans until such time as they are authorised. When applying for authorisation, firms will need to specify the permissions they seek authorisation for. The FCA will expect firms that solely operate in the funeral plan sector to only apply for permissions relevant to that sector. These new permissions will be:
“entering as provider into a funeral plan contract” and “carrying out a funeral plan contract as provider”.
A new Sourcebook: Funeral Planning Conduct of Business (“FPCOBS”) will be created for rules and guidance specific to the sector. Providers that are already authorised will need to apply to obtain these two new regulatory permissions.
Changes to the landscape
Firms active in this sector will need to be mindful of the following key considerations as they apply for authorisation and implementing FCA requirements:
- Firms that have not been subject to FCA supervision previously will need to conform to SMCR rules, and ensure Senior Managers are aware of their responsibilities under the regime.
- To ensure compliance with their new requirements, and overarching regulatory Principles, firms will need to start to review and enhance their governance and sales processes, including intermediary oversight, product oversight, conflicts of interest, risk management, and outsourcing.
- Authorisation will require firms to evidence they meet the FCA’s Threshold Conditions, have appropriate systems and controls in place, a regulatory business plan, and a compliance monitoring plan (“CMP”). In addition, firms will need to demonstrate how they will comply with the new FPCOBS sourcebook that includes trust and insurance related arrangements, restrictions on handling customers’ monies and prudential requirements.
- Firms will fall under the jurisdiction of the Financial Ombudsman Service once authorised, and will need to implement processes and controls to ensure complaints are recorded, reported, and handled appropriately to minimise FOS costs and remediation processes.
Beyond the actions firms will need to take to succeed in becoming authorised, the FCA have stated they are likely to make specific amendments within the funeral planning market which firms need to be mindful of when reviewing their existing processes and controls:
- All products must be backed by an appropriate trust or insurance arrangement
- Administration and cancellation fees must not be profit drivers
- Commission payments to distributors will be banned
- Funeral plans will need to be guaranteed after a moratorium period of up to 24-months in which plans do not need to be guaranteed, even if a consumer dies short of the full payment
- Providers will need to provide accessible product summaries
- Sales made via cold calls will be banned
Prudential requirements on funeral plan providers and intermediaries are proportionate to the size, risk profile and complexity of a funeral plan firm’s business activities and include general solvency and core capital resources requirements that are subject to regulatory reporting requirements.
The core capital requirements are set as the higher of £20,000 for funeral plan providers (£10,000 for distributors), 2.5% of the firm’s annual income and the fraction of the number derived from the number and the amount payable on undrawn funeral plan contracts (not relevant for funeral plan distributors). The FCA will require funeral plan providers to include in their authorisation a copy of the most recent Solvency Assessment Report (“SAR”), obtained from the trust’s appointed actuary. In addition, firms will be required to consider the adequacy of their financial resources in light of their trust or insurance arrangements to back funeral plan contracts under normal and wind down circumstances (FCA FG 20/1).
What firms need to do
Firms need to ensure they are ready for the opening of the authorisation gateway from September 2021, preparing by using the consultation papers and policy statement already issued by the FCA. This is key to ensuring the firm is able to comply with the proposed rule changes and have the structure, governance, and controls in place to ensure a successful authorisation application. The FCA have indicated that firms should prepare their application for submission as soon as the gateway opens to ensure applications can be considered and authorised ahead of the commencement of the regulatory regime in July 2022. To ensure they are ready for authorisation firms should:
- Determine how they would comply with the Senior Managers and Certification Regime and whether support would be required in embedding the regime within the firm
- Develop a detailed business plan for submission, including the Business strategy and rationale, Business model, Permission Scope, Financial resources, Governance, Risk management, and Compliance arrangements
- Consider the adequacy of their capital and financial resources against regulatory requirements under business as usual and stressed conditions, including an orderly wind down.
To ensure the firm meets the FCA’s rules for the funeral planning sector, as well as carrying out a gap analysis, firms should:
- Document how they will comply with the new regulations, for example
- The ban on cold calling
- New pre-sale disclosures
- Ban on commission payments to distributors
- New product rules
- Enhancing and formalising sales and distributor oversight
- Prepare initial and ongoing regulatory training for all staff members, and ongoing monitoring and testing to ensure processes continue to meet regulatory standards and deliver the right outcomes for consumers
- Monitor capital and financial resources and ensure that a wind down plan including recovery and resolution options is in place and effective.
Things to consider
From experience we understand the move to Financial Conduct Authority regulation has significant impact on the entire industry, firms and individuals. We expect the move to FCA regulation will see significant change across the Funeral Plan Sector, including the likely cessation of trading by some firms less inclined meet the demands of the regulator. The new regulatory regime will present an opportunity for firms to embrace the challenge, and drive forward improvements within the industry. Company mergers, the formation of new firms and partnership with those already FCA Authorised are all avenues open to those working in or moving to offer Funeral Plans.
Business strategies may need to be assessed against the Regulators expectations, and firms should expect to undergo a period of significant re-adjustment as the sector becomes regulated. This being said, the move to FCA regulation has seen industry wide change across many sectors (including most recently the regulation of all unsecured lending across the UK, and proposals around Buy Now Pay Later), which has not only improved the standards of consumer care at individual firms but has seen a whole of market improvement in product proposition, the delivery of fair and appropriate consumer outcomes, clear and comparable consumer communications, and the allocation of accountability to Senior Management.
As well as considering how to comply with FCA regulation, firms should ensure that other organisations relied upon within the distribution chain are taking action to meet the FCA regulations, and if they are not, consider whether the impact on the distribution chain can be managed and mitigated ahead of the rules coming into force. We anticipate distributors will seek to become Appointed Representatives of firms, representing an easier pathway than becoming directly authorised. The industry has raised concerned that intermediaries may exit the market entirely and switch to selling over 50s life insurance to ensure they can still claim commissions. The FCA believe that as intermediaries are only responsible for 28% of sales, with most intermediaries tied to a single provider, this will not adversely impact competition. However, there is a risk that if the market consolidates and distribution chains change, firms may not be able to ensure all their providers/distributors are remaining in the market and moving towards complying with the regulatory change.
The FCA have issued a follow up consultation paper, CP21/20, focusing on proposals around resolution arrangements firms should have in place to mitigate consumer harm in the event of firms’ failure, and to introduce protection under the Financial Services Compensation Scheme for consumers.
CP21/20 confirms the FCA’s proposal that firms will be expected to have arrangements in place to make payments to consumers or covered individuals in the event of insolvency. The FCA proposes that the quantum is not defined, and that the insolvency practitioner should account for the liability. Providers will be required to ensure that there is nothing in their contractual arrangements which will limit their liability for a funeral plan contract to a level that is below that needed to purchase a similar replacement funeral plan contract. This consultation closes on 31 August 2021.
We want to see an improvement in outcomes for consumers in this sector, with better value products, better sales practices and better controls in place so consumers can be confident they will receive the funeral they expect - FCA, PS21/8