This Insights piece looks at the new regulations on funeral plans. It’s the last chance to prepare for new regulation within the funeral plan industry, says Myerson Solicitors.
For those who are in the industry preparing for FCA regulation, which comes into effect in July (2022! Although a short extension has recently been announced), time is running out. It has been made clear by the FCA that anyone who needs to be FCA regulated from this date (which is all firms selling funeral plans or administering them) are fast running out of time to progress the necessary applications to the FCA and have their plans in place.
Why is this important?
From September, any firm selling or administering funeral plans in the UK has to be regulated. Failure to be regulated means the firm is unable to do business without committing a criminal offence and making all contracts concluded by the firm after the requirement becomes voidable by the customer.
Firms run the risk of a serious fine, not being able to enforce their agreements, handing back customers’ money without any deduction for their costs, and fundamentally blotting their copybook with the FCA. Note that this also applies to administering plans. Even if you do not plan to write new business but only to run off an existing book of business, you will still need to be authorised.
What can businesses in the industry do?
If your application is in hand, you still need to fully prepare to be in the regulated space from this time. This involves a full distribution review, capital adequacy and wind-down provisioning, and full product review.
If your application has not progressed, it needs to be as soon as possible. Firms who have not applied now will not hit the deadline. This will mean that they will have to cease trading due to missing the deadline.
Regulation of funeral plans and the changes to distribution
One of the many seismic changes in regulating the funeral plans industry this year is the change to the distribution model in the industry. Payment of commissions to sales agents will be banned.
This is a blanket ban. It means a new distribution model for many firms in the industry. Only an employed model or direct and owned marketing arrangements will be permitted.
Capital adequacy in the funeral planning business – pitfalls and solutions
From September (2022) the funeral planning industry will be regulated, and regulated firms are required to hold a level of capital to meet their liabilities.
Most firms in the industry are ‘backed’ by a trust structure, where funds paid by a customer taking out a plan are paid into a trust which invests the money to provide the cash to pay for the funeral when the plan holder dies.
Many firms will suppose that the issue is dealt with if the trust is adequately funded. Unfortunately, this would not be the case.
The FCA will require the trusts on an ongoing actuarial basis to be fully funded (and shortfalls paid over 12 months back from the funeral plan firm to the trust). Additionally, the firms themselves will have to carry adequate capital to work through a wind-down of their business and meet their liabilities, independently of the trust’s assets.
Firms that have relied upon drawdowns of surplus funds from the trusts (i.e., where a trust is over 100% funded to meet the plan liabilities) are no longer able to do so. The FCA will require a minimum of 110% cover before any drawdown, and crucially, the FCA’s permission for any drawdown is needed. It is unclear what criteria the FCA will apply to such drawdown even where the trust liability is above 100% covered, and the FCA is likely to be very wary, particularly in the near term, about giving consent to drawdowns and potentially setting precedents in the industry.
Many firms are, in any event, under-capitalised, so this is a potential ‘double-whammy’ (along with the restrictions to distribution and in the wake of the hit to business caused by covid).
However, various structures can be put into place now to help cover the position.
Selling your funeral plan business or its back book
All within the funeral care industry will be aware that the regulation will come into force very soon. The FCA will, in effect, determine who stays in business. Some firms will not.
Many will be thinking of run off or winding out the back book, but even administering plans will become an activity that is regulated.
Sale options are few as nobody is yet authorised. Currently, nobody knows who will become authorised as yet. Speculation within the industry is that the market will be trimmed to a small number of the bigger players (creating an oligopoly) who may then be tasked with helping administer or run off the defunct firms. But with this in mind, how many of the bigger players will have the appetite to bring new books into their business? Many of the smaller firms (and some big ones) are faced with difficult data issues, and differently structured plans cannot readily be included in existing businesses.
There is also the issue of the trust funds and their separate administrative requirements.
Directors may run serious risks of personal liability relating to wrongful trading.
Should you have any questions or would like more information regarding the Funeral Plan Regulation changes in 2022, contact the Corporate Team at Myerson Solicitors.