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APRIL 2018TowardsRegulation of thePrepaid FuneralPlanning Industry

Fairer Finance would like to thank our report sponsors

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYContentsForeword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132. Existing consumer protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . .183. Improving security of customer money. . . . . . . . . . . . . . . . . . . . 334. Improving conduct in the prepaid funeral planning market. . . 495. Approaches to regulation in other countries . . . . . . . . . . . . . . . 656. Routes to statutory regulation in the UK . . . . . . . . . . . . . . . . . . . 727. Conclusions and recommendations. . . . . . . . . . . . . . . . . . . . . . . 823

ForewordBy James DaleyFuneral plans can be an excellent way of removing the logisticaland financial strain from your loved ones when you’re gone. Theycan also be a cost-effective way of protecting against anyincreases in the cost of funerals.Last year, Fairer Finance’s report into sector, sponsored by Dignity,revealed numerous failings in this important market. Crucially, thelack of statutory regulation and compensation scheme meantcustomers’ money could be at risk.While most providers are acting responsibly, a minority continue toconduct themselves in a manner that would simply not be toleratedin a regulated market. A cocktail of high commissions, aggressivesales tactics and a lack of transparency indicated that customersdid not always understand the limitations of what they were buying,and that some newer providers were not maintaining the financialdiscipline which would be expected in a regulated market.Our initial report called for statutory regulation of the market, and thissecond report looks in greater detail at how that can be achieved.We want policymakers and regulators to act as a matter of urgency,so that bad practice in this market can be eliminated, and theresponsible players can thrive.We’re thankful to Co-op Funeralcare, Dignity, Ecclesiastical PlanningServices and Golden Charter for sponsoring this second piece of work– and to all the providers who gave up their time to provide input.We’ll be sharing this report with stakeholders in government andwithin the FCA and very much hope it can lay the path towardsstronger consumer protection in this market.4

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYExecutive summaryThis report follows on from Fairer Finance’s July 2017 reportentitled “Is the prepaid funeral planning market working well forconsumers?”. This was commissioned by Dignity, but full editorialcontrol rested with Fairer Finance.That report uncovered a number of failings in the prepaid funeralmarket – including concerns about the way plans were being sold,as well as the security of customers’ money.The prepaid funeral plan market is essentially unregulated. Andwhile the industry’s voluntary regulator, the Funeral PlanningAuthority, has been working to raise standards, not all planproviders are members of this body.5

Our initial report called for statutory regulation of the market. Allmajor providers in the market have supported this call – althoughthe majority favour the current voluntary regulator being granted astatutory remit, rather than the sector being brought under the wingof the Financial Conduct Authority. The Co-op has said it wouldfavour FCA regulation of the market.This follow up report has been funded by four of the largestcompanies in the market – Co-op Funeralcare, Dignity, GoldenCharter and Ecclesiastical Planning Services (including PerfectChoice). Once again, Fairer Finance has retained full editorialcontrol over the report.The report looks in detail at possible routes towards statutoryregulation, as well as considering how the existing voluntaryframework could be improved.Chapter 1 provides some background, including a precis of the findingsfrom the first report and details of progress in the months since.Existing regulationChapter 2 of the report looks in detail at the existing consumerprotections and the workings of the Funeral Planning Authority,including budgets and monitoring activity.Current legislation allows funeral plan firms to avoid FCA regulation byadhering to a list of conditions listed in the Financial Services & MarketsAct (Regulated Activities) Order 2001 (RAO). Although most providers inthe market purport to meet these conditions, there is little monitoring ofthis for those firms who are not members of the FPA.It is the FCA who is ultimately responsible for policing thesebreaches around its perimeter – but the FCA claims that to the bestof its knowledge, all firms in the market meet the terms of the RAO.6

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYOur research found evidence to the contrary, and we believe theFCA is failing in its duty to properly police the perimeter of thismarket.The industry’s voluntary regulator, the FPA, has had a positiveeffect on the conduct of the firms which have registered with it.However, its key weakness is that as a voluntary regulator it can’tcompel all providers to register with it.It is a small body run by two main staff working three days a week.The current CEO joined in December 2014 and has since beenworking on a programme of modernisation for the organisation.Key achievements include delivery of an independent board andcompliance committee and an increase in the levy for members.The FPA is also currently reviewing its Rules and Code of Practice.While the FPA has regular contact with most of its members andhas had some success at raising standards, its greatest weaknessis its inability to police those who don’t wish to join. We alsoquestion whether it can adequately monitor and enforce against itscurrent membership with its low level of resource.It charges members 4 for every plan they sell – but capsmembership fees at 70,000 per year. We believe that thisunnecessarily limits its resources and recommend that the cap beremoved. The FPA says it does not feel restrained by its budgets.Improving security of customer moneyChapter 3 of our report looks at what protections there are forcustomer money, and how these need to be improved.As funeral plans are unregulated, there is no formal FinancialServices Compensation Scheme (FSCS) coverage. While there issome limited FSCS coverage for plans backed by insurance7

schemes (as opposed to trusts), there are still potential gaps incoverage if a plan provider of an insurance-backed scheme wereto become insolvent.We note that Co-operative Funeralcare has received writtenconfirmation from the FSCS that its structure would ensure FSCSprotection in the case that the underlying insurer went out ofbusiness. However, the situation is less clear with some otherproviders, and there is little clarity for consumers on this issue, asthe plans themselves cannot be said to be covered by the FSCS.The RAO has a number of requirements that firms who operatetrusts are meant to meet. These include having an independentfund manager, and a majority of independent trustees.However, these do not appear to be effectively policed for firmsoutside of the FPA. Furthermore, there are no standardised ways ofcalculating trust values, and there is currently no way forconsumers to get a true indication of the financial health of a trustinto which their money will be placed.We would look like to see standardised calculations for assets andliabilities and the publication of a financial health measure – similar to acredit rating – which consumers could see before purchasing a funeralplan. This could apply to both the trust and life insurance models.We would like to see trust boards be entirely independent, and tosee minutes of trustee meetings and full accounts (includingactuarial assumptions) put into the public domain.If statutory regulation of the market is introduced, it will provechallenging to integrate the funeral plan market into the FSCS withtwo different models for protection of client money.8

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYThe two-tier structure also creates added and unnecessarycomplexity for consumers. If the government consults on statutoryregulation, we believe it should include a review of whether asingle mechanism for looking after client money should beimposed on the sector. It may be deemed that such a move at thisstage in the market’s development would be counter-productive,but we believe a full review should be carried out, as there wouldbe clear benefits in terms of consumer clarity.Improving conductChapter 4 looks at FPA rules around conduct and considers whatgaps may need to be filled in a statutory environment.We believe a clear set of principles should be laid down – akin tothe FCA’s Treating Customer’s Fairly regime – to complement amore comprehensive rulebook.We believe the FPA rulebook needs greater detail aroundmonitoring of third party sales agents, clarity of communication,disclosure, and the fit and proper persons test. And there shouldbe a cap on, or much tighter guidance around, cancellation fees– some of which run to as much as 20% of the plan value.Some providers want to see a cap on commissions within themarket, with disclosure to consumers of the amount paid. Highcommissions of up to 900 per plan continued to be paid, and weacknowledge concerns that this is likely to be driving pooroutcomes for consumers.However, publishing commission levels could disadvantage thosewho do not have established distribution channels and ultimatelyharm competition. A maximum commission level – as a percentageof plan value – may be more appropriate. This is a matter whichrequires further exploration.9

Examples from overseasChapter 5 looks at regulatory solutions for the prepaid funeralsector in other countries. In the Australian state of Victoria, funeraldirectors are banned from imposing top ups on customers oncethe plan is claimed upon.While both Ontario, Canada and Florida, USA have compensationschemes in place should a prepaid funeral plan provider collapse.Routes to statutory regulationChapter 6 looks at the two main potential routes to statutory regulation.Although most of the industry favours the creation of a standalonestatutory funeral regulator, from a practical perspective this remainsan unlikely outcome. We explain the reasons why in detail inChapter 6.10

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYCreation of a new statutory funeral regulator would require primarylegislation. With the current legislative agenda full with Brexit, civilservants made it clear that even if there were political appetite forsuch a move, it was implausible that there would be room on theagenda before 2022.Although our analysis suggested a statutory standalone funeralregulator would be cheaper for the industry, it would likely take upmore time and cost more for government. We don’t believe theadditional costs will be so high as to severely damage competitionin the market.Bringing the funeral plan market under the wing of the FCA wouldbe much easier to do from a practical perspective. The Treasurywould need to consult on an amendment to the RAO and couldmake the necessary changes through secondary legislation.The process would be lengthy. Even once the RAO had beenamended, the FCA would need to consult on how to amend itsown rulebook. If the Treasury committed to statutory regulationtoday, it is unlikely the process would be completed before 2021.However, this remains quicker than creating a statutory funeral planregulator, which would be, in our estimation, unlikely to beachievable before around 2024.Our hope is that by starting the process of moving towards FCAregulation, standards would immediately start to improve amongstfirms which aren’t registered with the FPA. Several non-registeredfirms have now applied for registration but haven’t completed theprocess at the time of writing.We’d also like to see the FPA develop a better public profile, sothat consumers are aware of the benefits of choosing an FPAregistered firm.11

ConclusionsIn the short-term, we want to see the FPA continue its programmeof modernisation. Even with the introduction of statutory regulation,the FPA will have an important role to play for at least another threeyears – during which time it can continue to have a material impacton conduct and consumer protection in the industry.The FPA should aim to strengthen itself to the point where itbecomes difficult for firms outside of the body to continueparticipating in the market.At the same time, the FCA needs to urgently step up its activity inpolicing the perimeter of this market – ensuring that firms who arenot meeting the terms of the RAO are appropriately sanctioned.Concurrently to the FPA’s programme and an increased FCApresence on the perimeter, we would like to see government firethe starting gun on the process of introducing statutory regulationto this market. Given the practical challenges of creating a statutoryFPA, we believe the government should move to amend the RAOand bring the industry into FCA regulation. This needs to happenas a matter of urgency to protect consumers, and we fear that itmay already be too late to protect all consumers in this market.Once statutory regulation is introduced, the FPA needn’t disappear.It could potentially transition to become the industry’s trade andprofessional standards body. It could then ensure that theinfrastructure and expertise that it has built continues to worktowards improving standards in the market. However, it is unclear ifthe FPA has the desire to move in this direction, and industryreaction to this suggestion is mixed.12

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYCHAPTER ONEIntroductionPrepaid funeral plans (PFPs) are a financial product which allowconsumers to pay upfront for some of the costs of their funeralbefore they die.As well as helping to reduce emotional and financial pressure onthe deceased’s loved ones, they can also provide an effective wayof protecting against any increase in the cost of funerals.The market has grown rapidly over the past decade. According tonumbers released by the Funeral Planning Authority (FPA), theindustry’s voluntary regulator, plan sales rose from 46,340 in 2002to 210,700 in 2016. A number of non-FPA members have also joinedthe market in recent years, and these providers are estimated tohave accounted for up to another 40,000 plan sales a year.In 2017, plan sales by FPA members fell slightly to 207,700 – thefirst decrease since 2006.Unlike similar financial sectors, the PFP market is largelyunregulated. As long as plan providers meet a small list ofconditions laid out in the Financial Services & Markets Act 2000(Regulated Activities) Order 2001 (RAO), they are not required to beregulated by the Financial Conduct Authority.The majority of plans are sold by companies who are members ofthe FPA, which requires them to abide by a Code of Practice and aset of Rules. A small but significant minority of plans are sold byfirms which are not members of the FPA.13

Last year, Fairer Finance published its first report into the sector,entitled “Is the prepaid funeral planning market working well forconsumers?” 1The report was commissioned and paid for by Dignity, one of thelargest sellers of PFPs in the UK. Dignity commissioned the reportas a result of its concerns about the conduct of some of itscompetitors in the market. It also commissioned independentresearch from Matter Communications, which informed FairerFinance’s conclusion.Fairer Finance retained full editorial control over the report,including the right to criticise Dignity.The report uncovered a number of consumer protection issueswithin the PFP market. Chief amongst these was a concern aboutthe safety of customers’ money in a market that has nocompensation scheme safety net. The report also shed light on anumber of conduct issues.A small but significant minority of firms were found to be usingaggressive telesales tactics, driven by high commissions of up to 900 per planA large number of firms were found to be lacking clarity in theirmarketing and customer communications.PFPs are complex products, and tests showed that consumersoften struggle to understand what they include and what theydon’t. In particular, understanding of the differences betweenfuneral director costs and third-party costs (known in the industryas ‘disbursements’) was poor. Research for our first report showedthat risks often weren’t surfaced in a clear way before ocuments/Funeral-plan-report-FINAL-6July-2017.pdf

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYincreasing the likelihood that customers did not understand all thebenefits and shortcomings of what they have bought.Matter Research carried out a series of tests with elderlycustomers, showing them brochures from funeral plan providersand then asking them questions around what was included. Allproviders were found to require improvement, although the largermore established companies were generally clearer.The research also identified a lack of understanding about thelevel of consumer protection surrounding funeral plans.Approximately 75% of funeral planholders wrongly believed thatthe product they had bought was FCA-regulated. Those who knewthat it wasn’t regulated by the FCA thought that it should be.Our first report called for the implementation of statutory regulationin the PFP sector. At that time, we suggested FCA regulation was15

the most practical route forward. We believed that the influence ofa well-known established regulator with far reaching enforcementpowers would have an immediate effect on conduct in this industry.Since then, Fairer Finance has interviewed and asked for inputfrom all the PFP firms named in our first report. We also hosted aroundtable session with the industry in late 2017 to discuss theissues the report raised.During our roundtable, there was unanimous agreement fromthose taking part in the discussion2 that the industry is in need ofsome form of statutory regulation.While the FPA is undertaking a programme of work to raisestandards in its industry, the biggest concerns about conduct andsecurity of client money relate to firms that sit outside of the FPA.Our initial research identified that non-FPA members wereengaging in the largest volumes of telemarketing and were payinglarge commissions of up to 900 a plan. In some cases, there wasno clawback on the commission if the customer cancelled – givingthe sales operative less incentive to execute a responsible sale.In terms of security of client money, the sector lacks transparency,which makes it impossible for consumers to have any certaintyaround which companies are managing client money responsibly.Nevertheless, since the publication of our last report, most FPAmembers have been willing to share trust accounts and actuarialvaluations of both trust and insurance assets with us (as relevant)– albeit mostly subject to non-disclosure agreements. No non-FPAmembers agreed to share this information with us.216In attendance: Open, Co-op, Choice, Dignity, Ecclesiastical, Golden Charter, GoldenLeaves, Open, Pride Planning, Royal London, Safe Hands, Sunlife.

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYAt Fairer Finance’s roundtable, most industry representatives saidtheir preferred route to regulation would be to give the FPA astatutory mandate. Only the Coop has been publicly supportive ofthe FCA taking responsibility for regulation of the sector – althoughothers have since told us that they would prefer FCA regulation tono statutory regulation at all.Towards statutory regulationFollowing our roundtable, Fairer Finance asked providers to fund asecond report into the sector, exploring what the path to statutoryregulation would look like.Subsequently, four FPA-registered providers – Co-op Funeralcare,Dignity, Golden Charter and Ecclesiastical Planning Services –agreed to fund this further piece of research. Once again, FairerFinance has retained full editorial control.This report will explore existing consumer protection and look atwhat improvements need to be made to better protect customers’money and to improve conduct. It will look at the routes to statutoryregulation and the potential costs of these different options. And itwill explore how funeral plans are regulated outside of the UK.We have met with the Treasury three times since publication of ourlast report and continue to engage with them on securing betterprotection for consumers in this market.17

CHAPTER TWOExisting consumer protectionBackgroundThe Financial Services & Markets Act 2000 (FSMA) underpins mostmodern-day regulation of financial services. It was this Act whichcreated the Financial Services Authority (since renamed theFinancial Conduct Authority) and defined the territory over whichthis new body would regulate.When FSMA was being drafted, the government was under pressureto include PFPs within the remit of the FSA’s oversight. In 1995, theOffice of Fair Trading had published a damning report into the PFPindustry3, highlighting concerns about the safety of customer moneyand about the way in which the plans were being sold.In subsequent years, concerns were also raised about the financialsecurity of one of the market’s biggest players, SCI4. And in 1999,the Treasury launched a consultation looking at how to improveprotection for consumers who buy PFPs.At this time, the average PFP cost around 1,2005 – around half oftoday’s prices if adjusted for inflation – and annual sales of theplans were no more than 50,000. The government concluded thatregulation by the FSA would be too heavy-handed and elected togive the PFP market an exemption.Nevertheless, the exemption was to be contingent on firmsmeeting a number of requirements that were designed to ess/1999/p7 99.html18

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYconsumers. These were laid out in the RAO6, which came into forceon 1 January 2002.The RAO stated that to remain exempt from FSA regulation, PFPproviders would need to either pay the customers’ money into awhole of life insurance policy or a trust. If the money was paid intoa trust, then there were further conditions to be met: the trust deed would need to be established by a writteninstrument more than half of the trustees had to be independent of theprovider the trusts’ assets must be managed by an independent fundmanager annual accounts had to be prepared for the trust the trust must be subjected to an independent actuarialassessment at least every three years.When the Economic Secretary to the Treasury, Patricia Hewitt,announced the consultation which led to these measures, it wasvery much positioned as a tightening of consumer protection. In astatement released in January 1999, Ms Hewitt said:“It is generally elderly people on modest incomes who takeout these plans. They want peace of mind for their familyafter they die - and these proposals will help to provide it.“We want to ensure pre-payment plans are properly regulated.But where plan providers make the necessary safeguards theycan be exempted from regulation by the le/60/made19

The Funeral Planning AuthorityTo provide additional protection for consumers, the industry set upthe Funeral Planning Authority. This is the market’s voluntaryregulator. Its mandate is to protect consumers and maintainstandards in the industry.At the outset, the Co-op, SCI (which later became Dignity) andGolden Charter accounted for around 80% of new business in themarket – and growth was relatively modest. Between 2003 and2007, sales of plans by FPA members grew 10% to 67,519 plans7.However, over the following five years, plan sales increased almost80% - and other non-FPA members began to enter the market.Interviews with industry practitioners suggest that in the early days,the FPA was not an effective voluntary regulator and was illequipped to cope with the rapid pace of change in its market. Untiltwo years ago, its board consisted of senior executives from thelargest companies that it was charged with regulating.The current chief executive of the FPA joined in December 2014,since when the body has undergone a programme ofmodernisation.Experienced and independent figures from the financial servicesand legal professions now sit on the board of the FPA and on itscompliance committee. A review of the Rules and Code of Practiceis under way, and discussions are ongoing about the possibility ofcreating an industry compensation scheme which could provideadditional protection for atistics/

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYStructure of the FPAThe FPA is a small organisation. Its last publicly available auditedaccounts – to March 2017 – shows its annual turnover at 200,000.This will have increased in the year to March 2018 due to anincrease in membership fees. Annual accounts had not beenpublished as this report went to press.The body has two main members of staff – its chief executive andits head of compliance, both of whom work three days a week.There are an additional three members of its compliancecommittee who each contribute roughly two or three days permonth, dependent on the need of the FPA.It also has staffing for administrative support, and outsourcesvarious other services such as IT, accounting, PR and public affairs.RulebookThe FPA regulations consist of two parts; a set of Rules8, and aCode of Practice9. Registered providers must follow each of these.The Code of Practice is a very broad 1,300-word document whichlays out expectations around conduct, marketing, communication,contracts and complaints.The rulebook is a longer document which is much more legalisticand specific in its requirements of members. It includes detailsaround the FPA’s decision making processes, and detailedrequirements in relation to management, valuation and auditing oftrusts. It also lays out the FPA’s powers to sanction gulations/code-of-practice/21

Monitoring activitiesThe FPA’s main proactive tool in monitoring compliance of its rulesis its annual re-registration process. This requires firms to submit alarge amount of information to the FPA – including trust deeds (ifrelevant), marketing literature, terms and conditions as well asreports from auditors and trustees.The re-registration pack includes a lengthy list of self-auditquestions which must also be completed by the member.The FPA’s compliance committee assesses these responses andtakes a risk-based approach to where it applies its time andresource. After giving firms reasonable notice, it can instructproviders to answer further questions, attend interviews, producedocuments for inspection or arrange site visits.The FPA interacts with firms directly on a routine basis. Most firmssaid they had regular contact with the FPA – mostly conversationsdirectly between senior management and the FPA’s CEO or Chairof the Compliance Committee.Many firms reported that contact with the FPA had significantlyincreased over the past few years. For example, one large firmexplained that the FPA had written to it during the past year,demanding improvement in several areas. The firm felt this showedthat FPA standards were steadily improving, as they hadn’treceived similar demands in the past.Several providers told us that they’re able to share new print andonline resources for customers with the FPA, to get its view onwhether these were suitable for consumers.A minority of members said that had very little contact with the FPAother than around the re-registration process.22

TOWARDS REGULATION OF THE PREPAID FUNERAL PLANNING INDUSTRYThe FPA said that as well as making regular contact with itsmembers, it made a number of site visits – including visits to listenin to customers calls, or interview staff within the business. Overthe 12 months to the end of March, the FPA said it had made 13 sitevisits to members, and a further 5 site visits to non-members.One criticism raised about the registration process itself is that itinvolves a lot of hard copy paperwork. Firms are asked to submitfour paper copies of all re-registration forms and supportingmaterial. This often amounts to several boxes of paper beingmailed to the FPA. Development of a digital portal for registrationand reporting might help to speed up the process, and lower costs.The FPA recently set up a stakeholder group, a forum for membersto meet and discuss the development of regulation. As at the endof March, the FPA said it had held two of these meetings, with morethan 15 member groups represented at each – including all themajor providers.What enforcement powers does the FPA have?As a voluntary regulator, the FPA relies to a great extent on thegoodwill and buy-in of its members to achieve its goal of improvingstandards in the industry. Although its rulebook outlines adisciplinary process, this is not something that it has ever used.Disciplinary processIf a matter is referred to the FPA Board (or if it considers that actionis necessary), the FPA may take disciplinary action.Its rulebook sets out the procedure, which takes place in front of aDisciplinary Panel. It

entitled “Is the prepaid funeral planning market working well for consumers?”. This was commissioned by Dignity, but full editorial control rested with Fairer Finance. That report uncovered a number of failings in the prepaid funeral market – including concerns about the way plans