Pre-paid funeral plans: call for evidence

Question 1

1. Introduction

Accepted Answer

1.1 Context

Over the course of the past year, concern has grown about the potential risk of consumer detriment within the pre-paid funeral plan sector. While the demand for funeral plans has grown considerably in recent years, with data from the Funeral Planning Authority indicating that sales in 2017 grew by around 245% when compared with sales in 2006, the regulatory framework that was developed for the sector in 2001 remains unchanged.

Citizens Advice Scotland and Fairer Finance have highlighted numerous failings in the sector, including a lack of clarity for consumers, high pressure and misleading sales activity and a lack of access to redress schemes if things go wrong. Fairer Finance has also raised doubts about the financial soundness of some trust-based providers. In light of this evidence, and following informal consultation with relevant stakeholders by HM Treasury, government has concluded that the current framework of self-regulation is not sufficient to ensure the fair treatment of consumers, and a more robust regulatory regime is needed.

The government has launched this call for evidence to aid in the design of a more appropriate regulatory framework. Overall, the government’s objectives are that any regulation of this sector should seek to ensure that:

all pre-paid funeral plan providers are subject to robust and enforceable conduct standards
there is enhanced oversight of providers’ prudential soundness
consumers have access to appropriate dispute resolution mechanisms if things go wrong

Pre-paid funeral plans exhibit many of the characteristics of other financial services products, such as insurance products. The government is therefore minded to strengthen regulation in the sector by bringing all pre-paid funeral plans into the remit of the Financial Conduct Authority (the FCA). This call for evidence seeks views and evidence on the merits of this proposal and responses to the call for evidence will inform any amendments to the regulatory framework which the government may seek to make.

For the purpose of this call for evidence, “funeral plans” should be taken to mean “pre-paid funeral plans”. The government is only seeking evidence in relation to the operation of this aspect of the funeral sector. This includes the conduct of both the sale, and provision, of pre-paid funeral contracts by both distributors and providers. The government is not seeking evidence in relation to the broader funeral sector or the quality or value for money of the funeral that is provided upon conclusion of the contract. In parallel to this call for evidence the Competition and Markets Authority has launched a market study into the supply of funerals in the United Kingdom.

The CMA’s market study will focus in particular on how competition between funeral directors works and transparency issues in the provision of funerals; it will also focus on how competition works in the crematoria segment of the industry.

1.2 Background to the funeral plan market

Products and trends

A funeral plan is a contract under which a customer makes one or more payments to a provider, who subsequently arranges or pays for a funeral upon the death of the customer. 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.

Members of the Funeral Planning Authority (FPA), which comprise around 95% of the market, have over 1.3 million undrawn plans, equating to approximately £4bn in assets under management. In 2017, these providers sold over 207,000 new plans, representing around 245% growth in annual sales when compared with 2006 figures.

1.3 Regulatory framework

Role of the FCA

The regulatory framework for funeral plans is governed by the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). Entering into a Funeral Plan contract as a provider is a specified kind of activity under the RAO. For these purposes, 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 for the customer upon their death (see Article 59). However, Article 60 exempts providers from regulation where one of two criteria are met:

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 instance contract must be effected and carried out by an authorised insurer.
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 Article 60 of the RAO. 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 (PRA), given that Article 3 of the RAO excludes funeral plan contracts from the definition of a contract of insurance. The government is not proposing to amend this definition.

The FCA’s Unauthorised Business Department (“UBD”) is responsible for assessing all reports about potential unauthorised activity and taking appropriate and proportionate action to stop harmful conduct. For UBD’s purposes, ‘unauthorised activity’ means regulated activity carried on by firms or individuals who are not FCA authorised or registered exempt. UBD receives in the region of 13,000 reports each year about potential unauthorised activity, ranging from reports about high value fraudulent investment schemes to small scale independent financial advisors. The department focuses its resources on the matters that pose the greatest risk to consumers.

When UBD receives information about an unauthorised funeral plan provider, it will make enquiries into the matter. This will typically entail sending a warning letter or engaging the provider in correspondence with a view to learning more about its business and assessing whether or not it is complying with the Article 60 exclusion. If the firm is found not to be complying with the Article 60 exclusion, UBD will consider what further action is necessary, depending on the level of seriousness and risk of consumer harm; this ranges from publishing a warning about the firm on the FCA’s consumer webpages or commencing a full investigation with a view to civil or criminal proceedings against the firm. In relation to funeral plans, the firms UBD typically looks into are not authorised with the FCA, are not registered with the Funeral Planning Authority (see below), and appear to be unable to rely on the Article 60 exclusion. The most common examples are funeral directors or other firms who claim to offer their own plans. UBD received reports relating to 12 such firms over the course of 2017.

Role of the Funeral Planning Authority

Approximately 95% of the funeral plan sector is voluntarily regulated by the FPA, a self-regulatory body for the sector. 24 providers, including the largest within the sector, are currently registered with the FPA.

The FPA maintains a Code of Practice with which registered providers must comply. This Code of Practice includes standards on:

Conduct – providers must act in a dignified manner, must not make unsolicited visits or telephone calls to potential customers and must not make misleading comments about the appropriateness of any funeral plan
Marketing and advertising – providers’ marketing material must be in good taste, must not make unsubstantiated claims and providers must give employees and agents training and written guidance on sales practices
Information – the FPA sets out all information that must be disclosed to customers, including costs and charges
Contracts and documents – providers’ must give consumers a written contract setting out terms and conditions
Plan funds – the FPA sets out how registered providers should handle customers’ payments, aligning with the exemption criteria in the RAO
Complaints and disputes – the FPA sets out high level processes for handling complaints which providers must adhere to

This Code of Practice is not legally binding and the voluntary nature of its jurisdiction means FPA cannot prevent firms from trading. However, the FPA reviews registered providers’ compliance with the Code on an annual basis and may terminate membership, which may have reputational consequences for firms, or levy a fine of up to £5,000 should a firm fail to adhere to its principals. These powers have never been used.

In addition to maintaining and enforcing its Code of Practice, the FPA also offers an independent conciliation and arbitration service to address complaints where these cannot be satisfactorily resolved between the customer and the provider.

The FPA also maintains a pledge to customers by which, in the event of the insolvency of an individual provider, other providers will examine ways in which the FPA may assist in arranging the delivery of the funerals for customers of the insolvent provider.

1.4 About this call for evidence

The government is seeking evidence and information on the funeral plan sector, the scale and nature of any consumer detriment and about how best to regulate the sector. In particular, the government is seeking views and evidence on:

how the pre-paid funeral plan market currently operates, particularly with respect to the types of business models in the sector both with respect to provision and distribution
the potential risk of consumer detriment under the current regulatory framework, and if present, where this risk is most acute
HM Treasury’s initial policy proposal to amend the RAO to allow for additional regulation of the sector by the FCA

The questions in this call for evidence are not exhaustive, and respondents should provide any further information they think may be relevant to the government’s policy position and the design of any necessary legislation, including the potential impacts of regulation in this sector.

1.5 Who should respond to this call for evidence?

The government is interested in views from all affected stakeholders, including funeral plan providers, funeral directors, insurers, asset managers, introducers, actuaries, solicitors, and consumer interest groups.

Before you participate, please read the privacy notice for this call for evidence.

Question 2

2. Questions for consideration

Accepted Answer

2.1 Customer experience and market structure

The government is seeking information about the overall structure of the funeral plan market, to ensure that any policy proposals and responses are proportionate and targeted. Specifically, the government is interested in the types of products that are commonly available, the distribution channels and marketing techniques, how consumers interact with the market and the nature and scale of any consumer detriment.

2.2 Market structure

The government understands that funeral plans are backed either by assets held in trust or by a whole-of-life insurance policy, on the life of the plan holder. The government seeks further information as to whether there are other types of funeral plans in the market, and in respect of insurance-backed plans, whether the policyholder is always the plan provider, rather than the customer. The government is also seeking further information about how different parts of the market interact, how market participants are remunerated and whether this gives rise to any conflicts of interest.

Question 1: Are there any other common ways to structure funeral plans, not outlined in this call for evidence?

Question 2: Are funeral plan providers always the policyholder of underlying insurance policies? Are you aware of any examples of insurance intermediation within the funeral plan sector?

Question 3: Where providers engage with third parties (e.g. funeral directors, charities, external companies), in what capacity do these third parties act and what is their relationship to the funeral plan provider? How are market participants remunerated and do any conflicts of interest arise?

Question 4: Are there any additional issues you think the government should be aware of in relation to the way in which funeral plan products are structured or sold?

2.3 Engagement with consumers at the point of sale

The government understands that funeral plans are made available to consumers through a variety of distribution channels, including direct marketing (such as telesales), online comparison sites, and through funeral directors. The government is aware that there has been criticism of the conduct of some providers and distributors at the point of sale. This includes reports of aggressive sales practices, websites that falsely claim to compare products across the market, and product literature which is unclear or misrepresents the potential risks and product features. The government is seeking further information and evidence of these types of sales practices, in order to better understand the scale and nature of any consumer detriment in the market

Question 5: How, and through what channels, do funeral plan providers communicate with consumers for the purposes of distributing information, promoting and selling funeral plans?

Question 6: What are your views on the scale and nature of consumer detriment at the point of sale? Please provide evidence where possible.

Question 7: To what extent is cold calling present within the funeral plan sector and does this present an additional or specific risk to consumers?

Question 8: How much on average do consumers pay for funeral plans and in what circumstances would consumers pay money directly to funeral providers?

2.4 Engagement with consumers after the point of sale

The government is also seeking further information about how consumers’ interests are protected after they take out a funeral plan with a provider (i.e. after the point of sale). The government takes consumer protection seriously and would like to see that consumers have adequate means to resolve any disputes with providers when things go wrong, including access to redress where appropriate.

Although the government notes that the FPA operates a dispute resolution service, it has no formal or statutory powers to bind providers to any decisions. Similarly, there is no financial redress, in the form of a compensation scheme, available to consumers to compensate them in circumstances where providers go bust. This means there is little security for consumers if things go wrong. Furthermore, the nature of funeral plans means that any issues with the product may not arise until after the consumer has died. The government wishes to understand whether these factors have resulted in any adverse impacts on consumers, and what potential issues may arise in the future if the current regulatory framework remains unchanged. 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 (FOS) and the Financial Services Compensation Scheme (FSCS). The government is interested in views on the merits of this approach, any potential consequences and any proposals stakeholders may have to ensure that the regulatory framework, including redress through the FOS and the FSCS, provides greater protection to consumers.

There have been reports that the investment strategies of some trust-based funeral plans are not sufficiently prudent to secure the long-term interest of plan holders (i.e. to ensure that adequate funds are available to meet the funeral costs of plan holders). Evidence and views are sought on how these schemes operate and what safeguards are in place to ensure providers are able to fulfil their obligations to consumers. The government is also interested to learn whether similar issues exist in relation to insurance-backed plans. The government is also interested in views from stakeholders on any other issues that may have an impact on consumers, which should be considered in the context of regulation of the funeral planning sector. For example, how do providers and/or funeral directors ensure that consumers’ interests are protected in the event that the funeral director nominated in the plan ceases trading.

Question: 9: What protections are currently in place for consumers (for example, complaints procedures) and how effective are these protections? How can complaints and claims be brought against funeral plan providers after the death of the customer?

Question: 10: What protections are currently in place for consumers if a funeral plan provider were to have insufficient money to pay claims, and what is your view of their effectiveness?

Question 11: What is your experience of the scale and nature of consumer detriment (if any) that arises once a funeral plan has been entered into? Does this vary for different types of plans?

Question 12: What are your views on the proposal to bring the sector within the scope of the FOS and/or the FSCS? What are most common types of complaints against funeral providers?

Question 13: What types of investment strategies are being adopted by trustees who are managing trusts on behalf of funeral plan providers and what is your view on the effectiveness of these strategies in securing the short and long-term interests of plan-holders? Are trust returns withdrawn by providers for revenue raising/profit purposes and, if so, what proportion of these returns are withdrawn in this way?

2.5 Proposals for regulation and potential impacts

As noted above, the government understands that, presently, the FCA does not regulate funeral plan contracts on the basis that all providers offer funeral plans that satisfy criteria for exclusion in Article 60 of the RAO.

In the light of this, and having regard to the government’s aim to ensure that consumers of funeral plans are properly protected, the government is seeking views on the most appropriate way of regulating the market, so as to secure the interests of consumers and address the issues outlined above.

The government’s preferred approach is to bring all funeral plan contracts into the scope of the FCA regulation. This is on the basis that these products exhibit many of the characteristics of financial services products and the FCA is therefore well-placed to regulate this sector, given that it has a broad suite of enforcement and supervision powers that would be well suited to driving up standards in the sector. This could include application of the FCA’s Treating Customers Fairly principles and Financial Promotions rules. The government’s view is that any amendments to the regulatory framework of funeral plan contracts could be effected by way of secondary legislation.

Some stakeholders have advocated strengthening the FPA by placing it on a statutory footing. The government’s initial view is that this is less favourable than FCA regulation for several reasons. First, a new regulatory architecture would need to be constructed, with suitable supervisory and enforcement powers. This would take considerable time to develop, and would be likely to require primary legislation, delaying the commencement of the regulatory regime. Second, creating a new statutory regulatory body from scratch is likely to be an expensive and lengthy process, with the burden for creating the new regulator falling squarely on the sector. Third, the government considers that creating a new regulator for funeral plans would be out of step with the broader approach to financial services regulation. The government therefore considers it would be more efficient and effective to bring the sector into FCA regulation, which would allow the sector to benefit from FCA’s extensive experience and from economies of scale.

The government is also interested in stakeholders’ views on the extent of any regulation, in terms of whether it should apply to all intermediaries in the distribution chain. The government is also considering whether, and if so how, the regulatory framework should be amended to provide protection to consumers who have already entered into funeral plan contracts and would welcome your views on this point.

Evidence is also sought on the impact of regulation on the sector, in particular, whether increased regulation would impact upon funeral plan providers and, if so, how. Such evidence will assist the government in formulating its policy response and preparing any relevant impact assessments.

Question 14: What are your views on the government’s proposal for FCA regulation of all funeral plan contracts and whether such a proposal will meet the government’s stated objectives (as set out above)? Do you consider that an alternative proposal could better meet these objectives?

Question 15: How should the regulatory framework apply in relation to funeral plans that consumers have already entered into?

Question 16: Should regulation extend beyond funeral plan providers, and apply to intermediaries engaged within the sector? Should such intermediaries become regulated entities, or should they be overseen by funeral plan providers as appointed representatives?

Question 17: What would be the overall impact on the market/your firm if all funeral plan contracts were subject to FCA regulation? Are there specific activities or businesses, such as SMEs, within the sector that would be particularly affected by strengthened regulation? What is your view of the potential costs and benefits of the government’s proposal?

Question 18: How long would the sector need to adapt to any new regulatory framework the government may seek to put in place?

Question 3

3. Conclusions and next steps

Accepted Answer

3.1 Conclusions

As discussed above, the government has concluded that the current framework of self-regulation in the funeral plan sector is not sufficient to ensure the fair treatment of consumers, and a more robust regulatory regime is needed. 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 looks forward to receiving views and evidence on this proposal.

3.2 How to respond

This call for evidence will be open for 2 months until 1 August. Responses should be sent directly to David.Reeves@hmtreasury.gsi.gov.uk and funeralplans@hmtreasury.gsi.gov.uk.

Before you participate, please read the privacy notice for this call for evidence.

Responses will be used by the government to formulate its policy response and prepare an impact assessment. The government understands that some of the questions in this call for evidence will require firms to disclose commercially sensitive information, and wishes to reassure respondents that this information will be handled appropriately. Responses will be shared with the FCA unless otherwise requested, who share this commitment to ensure that sensitive information is handled appropriately.

Question 4

4. Summary of questions

Accepted Answer