Preparing for regulation: What next for pre-paid funeral plans?
10 December 2020
Thursday 26 November was a significant day for the pre-paid funeral plan sector, as the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2020 (the “Draft Order”) was released, moving firms closer to being fully regulated.
The arrival of the Draft Order, which gives the FCA powers to set rules and guidance for the sector, was heralded by a statement from the regulator confirming it will consult on rules next spring and the sector will be fully regulated by summer 2022.
To date, pre-paid funeral plan providers and their intermediaries have enjoyed exemption from UK regulation on the basis the plan provider undertakes to apply the customer's payments to a whole life insurance policy, and to hold the proceeds on trust for funeral expenses. But recent concerns about the risk of consumer detriment have driven the government to reconsider.
For pre-paid plan providers and intermediaries who have an authorised firm within their group structure, such as a bank or an insurer, regulation may not seem so daunting. The authorised member will have experience the plan provider can draw upon. But there will be plan providers who do not have a group member with the experience to help them navigate the regulatory maze. For these plan providers, the authorisation process could be cumbersome if their application is deemed incomplete by the FCA, and the plan provider would be expected to promptly address gaps raised by the regulator to avoid a delay in receiving their licence. Firms seeking authorisation will also need to consider what seems like an avalanche of new rules.
The FCA’s threshold conditions, which are the minimum standards firms must meet to become and remain authorised in the UK, will be an essential starting point. The threshold conditions comprise:
- Location of offices: The registered office, head office and ‘mind and management’ of the firm must be in the UK.
- Effective supervision: The firm must be capable of being effectively supervised by the FCA.
- Appropriate resources: The firm must have appropriate financial and non-financial resources to conduct its regulated activities.
- Suitability: The management team must be ‘fit and proper’ and the business should be managed in a sound and prudent manner.
- Business model: The business model must be suitable for the regulated activities the firm will perform, with regard to the consumers’ interests and market integrity
Meeting these requirements may require plan providers and intermediaries to adjust their existing systems, recruitment processes and restructure their business.
In addition, there are likely to be requirements relating to prudential standards, complaints handling, remuneration requirements, systems and controls, reporting, governance, and key individuals will fall under the Senior Managers and Certification Regime. There are also likely to be conduct of business provisions covering matters such as identifying client needs, client communications and record keeping.
Given the nature of the pre-paid funeral plan product, Treating Customers Fairly and customer vulnerability requirements will also need to be embedded into the culture of the firm.
The sheer volume of potential rules and guidance can be daunting and may encourage those in the sector to consider alternatives to authorisation such as becoming an appointed representative of an authorised firm, stopping their regulated activities, or restructuring their business to minimise the impact of the FCA’s regulation. Becoming an appointed representative will mean the licensed UK firm who acts as the principal must have the regulated pre-paid funeral plan instrument and activities within the scope of their permission profile. As these will be newly regulated instruments and activities, such firms will need to apply for a variation of permission. Restructuring may reduce the regulatory burden but will need careful consideration and any intra-group outsourcing of administrative activity and technology to a shared services function will be subject to the FCA’s rules.
Given the scale of change, funeral plan providers and intermediaries should start to consider the impact of regulation and consider how to align themselves in order to be FCA authorised.