The Financial Services Compensation Scheme would have to provide funerals under plans drawn up by HM Treasury that could bring funeral plans under the Financial Conduct Authority's purview.
In July, HM Treasury issued a consultation on bringing pre-paid funeral plans under the remit of the Financial Conduct Authority, Financial Ombudsman Service and the FSCS, because the products exhibited the characteristics of financial products such as insurance.
But the Funeral Planning Authority (FPA), the industry body which currently regulates pre-paid funerals, has questioned how the FSCS would go about covering this industry.
It claimed if the FSCS were called upon to provide compensation for a failure of a funeral plan to pay out, it would also logically have to provide the funeral as well.
In response to the consultation, which closed to evidence on 1 August, the FPA explained: "For FSCS to provide coverage we and, more importantly, consumers, would expect it to provide the funeral.
"As we understand it, this would be the first time the FSCS would be being asked to compensate for failure to provide a service rather than compensating for loss of invested funds.
"A return of contributions paid 10 years from when the funeral plan was purchased is unlikely to cover the cost of the funeral. If the funeral is to be provided it is not clear how FSCS would administer this."
The FPA added that the service provided by the Fos would not be materially different from what is provided under its own complaints procedures, which often resolves disputes within two weeks while the Fos can take an average of three months.
While the majority of pre-paid funeral providers were members of the FPA, which exists to protect consumers’ interests, membership is voluntary meaning some providers and intermediaries are operating without an independent body to hold them to account.
Overall, the FPA said FCA regulation of pre-paid funerals would be costly, take time to implement and impact competition with an adverse impact on smaller, regional firms and the ability of funeral directors to be active participants in the market.
According to FPA figures, demand for pre-paid funeral plans has grown significantly in recent years ,with sales in 2017 at 207,000 new plans, up by around 245 per cent when compared with sales in 2006.
Members of the FPA, which comprises around 95 per cent of the market, have more than 1.3m undrawn plans, equating to approximately £4bn in assets under management.