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What has happened? 

In September 2023, the FCA publicised its funeral plan firms sector priorities for 2023-2025. It started regulating funeral plans on 29 July 2022 and this is the first sector priority letter that it has issued for this sector.

What are the key points?

The FCA has seen good practice such as funeral plan providers stepping in to take over books and provide ‘at-need’ funerals to consumers who were affected when other firms failed. However, the regulator also considers that there is still significant work for the industry to do to regain market and consumer confidence.

Financial Resources

The external economic environment, including inflation and the cost of living crisis, has presented challenges to the funeral plans sector. It has become increasingly important that firms closely and robustly monitor their financial resources to ensure they maintain adequate capital, of appropriate quality, to meet their capital and liquidity requirements and liabilities. Any weaknesses can lead to poor consumer outcomes where consumers are unable to redeem their funeral plans when needed.

The FCA expects firms to ensure that they robustly support assessments of their capital adequacy and liquidity with appropriate controls and governance arrangements, and that they take appropriate steps to address any shortfalls. It will continue to monitor firms’ regulatory returns data and may evaluate firms’ documented risk assessments, if it considers that to be necessary. It will also continue to review Solvency Assessment Reports (SARs), since it has concerns that the level of detail reported in the SARs does not enable it to fully understand and validate the key assumptions used to assess the solvency levels and risks faced by the trust.

Firms offering trust-backed products should ensure a diversified mix of appropriate investments for their funds, and proactively monitor their trust solvency. The FCA will challenge instances of inadequate financial resources, such as habitual capital injections to maintain required solvency levels. It considers that such practices may indicate embedded problems in a firm, such as poor governance or poor trust management practices.

Firms offering insurance-backed products should keep in mind the need for investment plans to bridge any gap between insurance asset growth and the impact of inflation on funeral delivery costs. Wind-down plans should be reviewed annually to ensure that the business can be run off in an orderly way if needed and they should include clear triggers for implementing the plan. Firms should also consider how macro-economic factors affect both their business models and consumers. They must be able to demonstrate that they remain viable and sustainable through severe but plausible stress scenarios, with a range of management actions to manage any risks of harm.

Embedding the Consumer Duty

The FCA expects firms to take appropriate action to ensure that their products and services offer fair value and meet consumers’ needs, that consumers receive clear information they can easily understand and that they have the support they need when they need it. This applies to both open and closed products.

The Consumer Duty introduced a requirement for firms to conduct a review of their closed books, revisiting historic product terms and conditions to ensure consumers do not suffer negative effects. Firms have until 31 July 2024 to complete these reviews. For a sector new to regulation, the FCA expects that this exercise could highlight adverse outcomes for consumers, and it will expect firms to take appropriate action where they identify poor outcomes. Firms must ensure fair value for consumers throughout the consumer journey, from the time a consumer contacts a firm to the point of delivering the funeral.

Over the past year, the FCA has continued to identify instances where firms failed to achieve good outcomes for their consumers, including insufficient disclosure during the sales process and publishing misleading financial promotions, and so firms need to further improve and strengthen their control frameworks and governance. While it generally sees good intentions from Boards, the FCA is concerned they are not taking enough action to ensure the positive outcomes for consumers which are essential for full delivery of the Consumer Duty. It therefore expects firms’ Boards to take proactive action on its priorities and not treat them as merely a compliance exercise.

The FCA plans to organise roundtables for the industry over the coming months to help firms to understand its expectations.

Consumer support

Trends across the insurance market show an emerging risk of consumer harm from the impact of the wider economic environment on firms’ profitability. A lack of customer support could occur where firms focus on making profits and cutting costs in a challenging economic environment at the expense of maintaining good customer outcomes. The funeral plan sector needs to be conscious of this and to have appropriate policies, systems and controls in place to analyse complaint information and respond accordingly.

Improving Oversight of Appointed Representatives

The FCA expects principal firms to have effective oversight of their ARs and to ensure they are competent, financially stable and deliver good outcomes for consumers. A firm that acts as principal should ensure that it has set clear standards for its ARs to meet, that it has appropriate controls in place to effectively oversee its ARs’ activities and that its ARs comply with the Consumer Duty. The FCA will expect to see principal firms taking assertive action with ARs that fall below the standards set by the principal firm, including restricting their regulated activities and cancelling their AR status.

The FCA has recently gathered important data on ARs in the market via an information request to principal firms. It has undertaken to use this to identify outlier firms and risks of harm and will act where necessary.

Governance and Culture

The FCA has seen indicators in the market of poor governance and weaknesses in systems and controls. It recognises that this sector is new to FCA regulation, but is reminding firms of the need for appropriate governance, controls and oversight, commensurate with the size and scale of their business.

Operational Resilience

FCA data shows incidences of a lack of operational resilience within firms (including failure to protect client data), to the harm of consumers and the wider market. It is particularly concerned with the level of oversight and contingency planning in relation to outsourced services, where adequate controls are not in place, and where consumers experience poor outcomes if a problem occurs. Firms need to have credible plans in place to mitigate and recover from these risks, take remedial action where necessary and notify appropriate regulators promptly as appropriate. Areas of particular concern include the risks of cyber-attacks and ensuring there are adequate controls in place where information is held by third parties.

Regulatory Reporting

In the first year, the FCA received several sets of conduct and prudential regulatory returns from funeral plan firms, and these have not always been of the quality it would expect, with inaccurate and missing data. Firms need to take action to improve the quality of their regulatory returns, to ensure they are providing accurate information.

The FCA will hold roundtable sessions over the coming months to help firms understand its expectations, best practices and measures to take to improve data accuracy and quality.

Firms that act as principal firms with Appointed Representatives must also provide regular reporting data about their ARs. From December 2023, this will include AR complaints and revenue data once a year in RegData, reported in line with the Accounting Reference Data (ARD). The principal firm must check, amend and confirm details of its ARs and Introducer ARs (IARs) annually, using Connect. In both cases, the data must be submitted within 60 business days of its ARD.

Unauthorised Business

The FCA is aware that there are several ARs holding undeclared legacy funeral plan books without appropriate permissions and therefore conducting unauthorised business. This is a serious concern as it poses significant risk of harm to consumers who are not covered by the protections provided by FCA regulation. The fact that several ARs have been able to hold onto the books undetected shows an urgent need for improvement in the oversight of ARs by their principal firms. The FCA expects all principal firms to undertake a review of their ARs to ensure that no unregulated activity is taking place.

Action for firms

CEOs are responsible for ensuring that their firms meet FCA requirements, including the obligations and expectations set out above. They should take all necessary action to ensure these are met and that they are prepared for the additional requirements that the Consumer Duty brings to these priority areas.

The FCA will use the Senior Managers & Certification Regime to engage directly with accountable individuals on areas of concern. A significant part of its activity over the next two years will be to test firms against its priorities and expectations. It will also continue to use data to identify outliers. Where firms are not meeting its rules and expectations, it will take action.

How can Thistle Initiatives help? 

Thistle Initiatives has supported firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as-and-when, our team of specialists can serve as your right hand in meeting and complying with FCA regulation. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Are you looking for help with your funeral plan firm regulatory arrangements, Appointed Representative oversight, the Consumer Duty, or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.