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The FCA has set out hefty new requirements for funeral plan providers when they come under the watchdog’s regulation. The consultation – outlined in CP21/4 closed in mid April with a final policy statement due to follow in due course. The changes are likely to prompt a significant shake up of the £4bn funeral plan industry, for funeral plan providers and across the distribution chain – including funeral directors.
From 29 July 2022, activities involving the provision and distribution of pre-paid funeral plans will come under FCA regulation, and firms conducting these activities will need to be FCA authorised.
Inevitably there will be consolidation, as smaller firms exit, and there will be a greater focus on direct-to-consumer sales models. But for those firms who are seeking to raise standards in the industry, and deliver good outcomes for customers, driving out poor practices will lead to opportunities.
FCA regulation can impact your strategy
Firms seeking to remain in the sector will need to consider:
- How the product can be distributed
- How people involved in the sales process can be rewarded
- What level of sales can be achieved
- At what revenue
- What additional costs will be required to develop and oversee a compliant process.
Inevitably the answers to these questions will impact business models and sales strategies. And it is incredibly important for firms to have those honest internal conversations about what the future will look like.
Firms who fail to adapt their targets in response to changing environments can end up feeling the impact of those poor decisions further down the line. Pressure to make sales and meet unrealistic targets will drive the sort of behaviours which result in mis-selling.
Where the FCA has concerns
The drivers for this move to regulation come from the FCA’s assessment of the product and the way it is sold. In the regulator’s view, the funeral product has the characteristics of a financial services product and should be regulated as such. In particular, it references similarities with over-50s plans, which are regulated insurance products. And this provides a useful read-across when considering the extent of the rules the FCA is seeking to apply. In addition to seeing the funeral plan product as something that should be regulated, the FCA also believes there is significant customer detriment occurring in the current way it has been sold. The FCA has raised concerns across a number of areas:
- Ineffective governance and oversight by senior management
- Poor sales practices, including cold calling
- High commission levels
- Inadequate customer information
- High prices
- Poor value and product design
- A range of conflicts of interest across the distribution chain.
What the regulator requires
It is these concerns which have prompted the FCA to propose the wide ranging regulatory regime, summarised below.
FCA expects plan providers to:
- ‘Act honestly, fairly and professionally’ in accordance with the best interests of their customers.
- Design products that meet the needs of a clearly defined target market, ensuring that the products offer fair value to consumers. Products must be designed so that they deliver the expected funeral regardless of whether or not the consumer has paid all the instalments at the time of death.
- Select appropriate distribution channels to ensure plans are marketed and sold properly.
- Not receive remuneration which would conflict with the duty to act in the customer’s best interests.
- Not remunerate or performance manage their employees in a way that would conflict with the customer’s best interests.
- Not pay commission to distributors.
- Regularly review their products, and how they are distributed, and take actions to mitigate any issues they find.
- Produce clear product summary documents which set out the main features, exclusions and limitations of their plans.
- Send the customer annual statements setting out key information about their plan.
- Provide information about the plan to the customer’s representatives.
- Nominate a local funeral director to carry out the funeral.
- Make sure that the funeral is provided to a satisfactory quality in line with the plan.
Whilst these proposals are current in the consultation phase, firms should expect the final rules will be similar in scope. Funeral plan providers should start now to think about the areas they need to focus on.
Senior management oversight
The senior managers within firms will be responsible for the oversight of activities, and for ensuring customers receive good outcomes. The FCA will hold them personally responsible.
Business models
Firms will need to consider how their products are being sold to customers, and whether the people involved in the sales process also need to be authorised by the FCA. The current levels of commissions paid to intermediaries will no longer be sustainable. And firms should consider any potential conflicts with payments received from trusts or insurance providers.
Sales process
Customers must be treated fairly, and clearly informed of the benefits and limitations of products. The sales process will be lengthier, and more formalised. Special care must be taken with customers who are vulnerable. Any form of ‘high pressure selling’ or cold calling will not be acceptable.
Product
Firms must go through a formal product governance process, to determine whether their products are fair and offer good value. If a plan is marketed as paying for a funeral, that is what it should provide. Any charges must be fair and instalment fees must be reasonable.
Prudential requirements
Firms will need to ensure there are sufficient funds available to meet their liabilities, and back their plans with adequate trust or insurance arrangements. Appropriate wind down plans will need to be in place if firms are at risk of failure, and customers’ monies will need to be protected.
Complaints handling and FOS rights
Firms will need a structured complaints handling process, and customers will have the right to escalate to the Financial Ombudsman Service.
How Bovill can help
At Bovill we have spent many years helping firms who are new to FCA regulation, build the systems and controls they need – to become authorised, and stay authorised. We’ve worked with businesses in Consumer Credit, Claims Management, Buy Now Pay Later (BNPL), and now funeral planning.
We can help remove the complexity of regulatory requirements and develop pragmatic solutions that enable businesses to trade profitably, and also compliantly.
