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If you have any more questions or would like more information regarding the funeral plan regulation changes, you can contact our Corporate Team below
Last chance to prepare for regulation in the funeral planning industry
For those in the industry preparing for the Financial Conduct Authority regulation (The FCA), which comes into effect in July 2022, time is running out. Although a short extension has recently been announced. The FCA has made it clear that anyone who needs to be FCA regulated from this date – which is all firms selling funeral plans or administering them – are fast running out of time to progress the necessary applications to the FCA and have their plans in place.
Why is this important?
From September 2022, any firm selling or administering funeral plans in the UK must be regulated. Failure to be regulated means the firm cannot do business without committing a criminal offence and making all contracts concluded by the firm after the requirement becomes voidable by the customer. Firms run the risk of a serious fine, not being able to enforce their agreements and handing back customers’ money without any deduction for their costs, and fundamentally blotting their copybook with the FCA.
Note that this also applies to administering plans. Even if you plan not to write new business but only to run off an existing book of business, you still need to be authorised.
What can you do?
If your application is in hand, you still need to prepare fully to be in the regulated space from this time – this entails a full distribution review, capital adequacy and wind-down provisioning, and full product review.
If your application has not progressed, it needs to be – and fast! Firms who have not applied now will not hit the deadline – and will have to cease trading.
Regulation of funeral plans and the changes to distribution
One of the many seismic changes to regulating the funeral plans industry this year is the change to the distribution model in the industry. Payment of commissions to sales agents will be banned.
This is a blanket ban. It means a new distribution model for many firms in the industry. Only an employed model or direct and owned marketing arrangements will be permitted.
We can help funeral plan providers through the regulation changes
We act for firms in the industry and have seen several new business distribution models evolving. Care needs to be taken in relation to what is done to sell plans – and the selling of plans and any advertisements of them will need to be done by a regulated firm or approved by one (from regulation coming into operation) to not be a criminal offence.
Capital adequacy in the funeral planning business – pitfalls and solutions
From September (2022) the funeral planning industry will be regulated and regulated firms are required to hold a level of capital to meet their liabilities. Most firms in the industry are ‘backed’ by a trust structure, where funds paid by a customer taking out a plan are paid into a trust which invests the money to provide the cash to pay for the funeral when the plan holder dies.
Many firms will suppose that if the trust is adequately funded, the issue is dealt with. Those firms would be wrong. The FCA will require the trusts on an ongoing actuarial basis to be fully funded (and shortfalls paid over 12 months back from the funeral plan firm to the trust), but in addition, the firms themselves have to carry adequate capital to work through a wind-down of their business and meet their liabilities, independently of the trust’s assets.
Firms which have relied upon drawdowns of surplus funds from the trusts (i.e., where a trust is over 100% funded to meet the plan liabilities) can no longer do so – the FCA will require a minimum of 110% cover before any drawdown, and – crucially – the FCA’s permission for any drawdown is needed. It is unclear what criteria the FCA will apply to such drawdown even where the trust liability is above 100% covered. The FCA is likely to be very cautious, particularly in the near term, about giving consent to drawdowns and potentially setting precedents in the industry.
Selling your funeral plan business or its back book
Many firms are, in any event, under-capitalised, so this is a potential ‘double-whammy’ (on top of the distribution restrictions and in the wake of the hit to business caused by Covid).
However, various structures that can be put into place now to help cover the position.
As the industry will know, the regulation comes into force very soon. The FCA will, in effect, pick who stays in business. Some firms will not.
Many will be thinking of a run-off or winding out the back book, but even administering plans will become a regulated activity.
Sale options are few as nobody is yet authorised, and nobody has yet an inkling as to who will become authorised. Industry speculation is that the market will be trimmed to a small number of the bigger players (creating an oligopoly) who may then be tasked with helping administer or run off the defunct firms – but how many of the bigger players will have the appetite to bring new books into their business? Many smaller firms (and some big ones) are faced with difficult data issues, and differently structured plans cannot readily be subsumed into existing businesses. Then there is the issue of the trust funds and their separate administrative requirements.
Directors may run serious risks of personal liability relating to wrongful trading.