The Financial Conduct Authority has set out its proposals on how it will regulate the pre-paid funeral plans sector, including plans to ditch commission payments and permissions to advise on the plans.
In a consultation published this morning (March 2), the regulator laid out how it will move to improve standards in the sector following concerns about how some pre-paid funeral plan providers were operating.
As part of this the FCA said that from July 2022, when the FCA takes on responsibility for regulating the pre-paid funeral plans sector, advice in this market will come under the “advising on investments” permission.
FTAdviser understands that if a firm is recommending specific funeral plans to customers then it is very likely to be advice, and so all firms recommending the plans will be required to hold this permission.
Their clients will then have access to recourse from the Financial Ombudsman Service and Financial Services Compensation Scheme, which some say could push the levies up further.
Anyone giving such a personal recommendation must base their advice on “fair and personal analysis” of the funeral plans market and provide a personalised explanation why the proposed product best meets the customer’s demands and needs.
The FCA stated: “This includes considering all the customer’s requirements and ensuring that the funeral plans they offer are suitable for the customer’s needs.”
Alan Lakey, director at Highclere Financial, said it came as no surprise that the regulator wanted these plans to be treated as investments for advice purposes.
Lakey said: “There has always been a distinction between plans that might pay out (term assurance) and those that will (whole life).
“Funeral plans naturally fall into the second sector so it is no real surprise that the regulator wants them to be treated as investments. This is a natural consequence of the existing rules.
“Those advisers working under ICOB (Insurance Conduct of Business) rules will be debarred and only those advisers operating under COBS will be allowed to advise.”
As with investments advisers will now need to issue suitability reports once regulated advice has been given.
Lakey added: “Suitability letters will be a consequence and, also, let’s not forget that the majority of buyers may fall into the ‘vulnerable’ category.
“A properly set out suitability letter will be essential to protect advisers against potential future claims.”
Boost to profession?
Felix Milton, chartered financial planner at Philip J Milton & Company, said on the back of these rules, advisers will see an increase in requests from clients.
Milton said: “The reason these plans have been so prevalent is that the marketing machine of the larger providers coupled with a large commission of up to £900 for the salesperson has meant that these have been sold to so many people who don’t need them.
“I’ve had several clients ring me and ask for our views on them and when I explained the process that happens on death and the fact that the estate can release money quickly to pay funeral expenses, most realise they don’t need this cover."
While he did not think these plans will disappear altogether, Milton believed their prevalence would fall.
He added: “A good adviser will not likely advise one of these policies to their clients, as in my view, clients of a typical adviser probably have assets sufficient to cover funeral costs on death anyway.”
The FCA said commission payments should be banned to stop any conflicts of interest or poor outcomes.
This means advisers will only be allowed to be paid via direct fees from clients, which need to be clearly disclosed.
Milton said: “Banning commission is a much better outcome and I expect we’ll see much fewer of these policies sold going forward as it’s much harder to justify selling one of these policies when the FCA is ruling that most at present aren’t good value.
“I would say that if you’re likely to die with £5-£10k in your bank account that these plans are wholly unsuitable and poor value for money.”
FSCS
Under the FCA’s proposed rules, clients will have access to the FSCS and Fos from day one in the event that they are given negligent advice or the firm fails without paying out its obligations.
It is proposed that the compensation limit for funeral plan claims should be £85,000, the same as investment claims.
However, as the average cost of a funeral plan is typically between £2,500 and £5,000, the FCA said it is very unlikely that claims will exceed this limit.
In order to pay out these claims, the FCA has suggested a combined funding class for funeral plan claims, which will cover both funeral plan provision and distribution.
This class, which would contribute to the management expenses levy and the compensation costs levy (including contributions to the retail pool if required), will be funded by FCA regulated funeral plan providers and distributors based on “the total amount of relevant business conducted”.
The FCA stated: “The annual income will be based on the firm’s net income in relation to funeral plan business, including commission and fees.”
Ricky Chan, director and chartered financial planner at IFS Wealth & Pensions, welcomed this added protection but warned it could see adviser levies increase further.
He said: “Consumers will have increased protection as potential 'misselling' will subsequently be eligible for FSCS compensation.
“Whilst I’m pleased to see an increase in professionalism across the board, I feel that the FCA’s ever increasing powers mean that their resources will be overstretched - this comes at a time when the effective of the FCA’s regulation has been called into question.
“In addition, as more products become regulated, it also means that there will be an increased likelihood of future compensations paid out by FSCS - hence advisers are likely to see their annual regulatory fees and levies increase.”
amy.austin@ft.com
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