Funeral plans regulator: Customers will lose out if more firms leave

Graeme McAusland told FTAdviser his “biggest worry” was that the number of firms that will not get through the authorisation process will cost customers part of their prepaid plans.

In instances where firms choose not to get authorised, wind down and then find they cannot sell their client books, McAusland said he feared customers would not be refunded as much as they put in to the plans they took out.

A funeral plan allows someone to pay upfront for theirs or their relative’s funeral before they die. The product could be used by those with no family, by those caught in family disputes, or by parents of children with severe disabilities who want to put something in place before they or their child dies.

The payments to customers may well be less than they paid in.--McAusland

So far, three funeral plan providers have pulled their applications to become regulated by the Financial Conduct Authority. “Our expectation is there will be more [firms] that don’t make it through the gate,” said McAusland.

Safe Hands Funeral Plans’ exit was announced by the FCA earlier this week (February 15). On its website, the provider said it had “made the decision not to continue to provide funeral plan services” after July 29, which is when the FCA will start regulating the pre-paid funeral plans sector. 

FTAdviser approached Safe Hands Funeral Plans for comment.

Two Yorkshire-based firms, Eternal Peace Funeral Plans and PS Cremations Funeral Planning, have also withdrawn their applications. In total, there are 72 firms listed, 30 of which are yet to submit their application.

Some view it as the price to clean up the market, but this doesn’t help the consumer.Graeme McAusland

McAusland said he has been trying to warn the industry for some time that there is a “transition risk”. Existing firms which don’t or can’t meet the FCA’s criteria will have to transfer their client books.

While some can sell up if they wish to wind down, others will not, according to McAusland. “There might not be enough money in the plans to make them worth selling, or newly regulated firms might worry about how certain plans were sold.”

In cases where firms wind up without selling, they will refund customers’ plans. “The payments to customers may well be less than they paid in,” said McAusland.

Whilst it’s still early days, the worry is a “reasonably significant” number of customers will be impacted, as the deadline looms and firms have less and less time to make commercial arrangements pending the submissions and outcomes of their authorisation applications.

“Some view it as the price to clean up the market, but this doesn’t help the consumer,” said McAusland.

An already small market

The FPA is a voluntary body which was set up back in 2002 in an effort to regulate the funeral plans sector. But around 2017, reports surfaced suggesting providers were ‘pressure selling’ and, in some cases, not funding plans properly.

“Some of this was true,” said McAusland. “But in our view, it was nowhere near as significant as was given weight.” Following these reports, HM Treasury looked into it and transferred the sector to the FCA’s jurisdiction. The FPA will hand over the reigns at the end of July.

McAusland said the FCA’s approach to the sector is going to increase the price of funeral plans and reduce competition. “This is not a big market, you’re talking about £5bn of assets, which is a medium-sized insurance company. Once you add the fixed overhead of regulation, this becomes even harder to sustain.”

An FCA spokesperson told FTAdviser the new rules were to make sure consumers are sold products that offer fair value, including banning cold calling and all commission payments to intermediaries. 

“We have been proactive to ensure that only firms which will meet our standards will be authorised by us, giving consumers confidence and protection in the event that things go wrong,” they said.

Once funeral plan providers come under our regulation, funeral plan customers will be able to make a complaint to the Financial Ombudsman Service. They will have protection from the Financial Services Compensation Scheme should their provider go out of business, though those with providers which do before July 29 will not.

Advisers still ‘unlikely’ to get involved

Despite the prospect of a more regulated sector on the horizon, McAusland reckons advisers will stay away from it.

Traditionally, advisers have avoided funeral plans due to a lack of regulation. But McAusland said it also came down to the fact there was no commission on these products, and the FCA does not intend to introduce any on them in the near future.

“Advisers getting involved in a significant way seems unlikely, and there'll be no commission,” he explained.

But Andrew Gething, chief executive of Morgan Ash, said the advice industry's perspective on funeral plans was that they are “very poor value” and that the FCA’s fair value requirements within Consumer Duty regulations are “likely to challenge their present pricing models”.

Kevin Carr, chief executive of Protection Review, agreed, adding that it was an issue of reputation.

“Like most over 50s plans, funeral plans are ‘auto-acceptance’ i.e. no underwriting. This means it’s easy to buy, but often a two-year moratorium applies which means you can’t claim in the first two years,” he explained.

“If you’re healthy, a standard Whole of Life plan is likely to be a much better option.”

Funeral plans haven’t, to date, been an ‘IFA product’ per se, due to the fact they are targeted at clients direct and are designed for less affluent people buying online.

But it seems even with more regulation, an overhaul of the sector’s pricing model would have to take place before IFAs considered them for their clients.

Arguably, regulation will go someway to fixing pricing. Nicholas Hill, a senior advice manager at the Money and Pensions Service, said the requirement for funeral plan providers to meet minimum standards will mean consumers are “less likely to be caught out with unexpected costs when planning a funeral”.

Even so, Hill said the MPS “strongly urge[s]” consumers to review the pros and cons of funeral plans before making a decision, and to remain wary of any cold callers trying to sell them a plan.

ruby.hinchliffe@ft.com