Regulation of pre-paid funeral plan providers: issues for UK insolvency practitioners

Out-Law Guide | 13 May 2022 | 3:42 pm | 6 min. read

Firms wishing to provide or sell pre-paid funeral plans in the UK will need to be authorised by the Financial Conduct Authority (FCA) by 29 July 2022. Insolvency practitioners that are appointed over such businesses will need to ensure compliance with new rules that are to come into force on the same date.

The pre-paid funeral plans market, which now sees in excess of 250,000 plans being sold each year, has seen a recent high-profile failure in the administration of Safe Hands Funeral Plans which had approximately 46,000 customers and further failures are expected. Pinsent Masons is advising the joint administrators of Safe Hands Plans.

The government is keen to ensure that, when providers become insolvent, the FCA and the Financial Services Compensation Scheme (FSCS) have the powers that they need to allow for continuity of cover to consumers and to permit swift recovery by the FSCS where it has made compensation payments to consumers.

Directors of funeral plan providers that will not be able to obtain FCA authorisation will also need to be aware of their duties to customers and other creditors, and their book of funeral plans may need to be transferred to an alternative provider in advance of 29 July 2022.

Government regulation of the pre-paid funeral plan sector is much needed given a number of the businesses that operate within it receive large sums of money from often vulnerable consumers and the contracts that underpin funeral plan arrangements including the trust deeds and insurance policies are often complex.

Supplementary provisions introduced by the government will also place a positive duty on insolvency practitioners to comply with the FSCS if they are appointed over regulated providers.

What is a pre-paid funeral plan?

A pre-paid funeral plan allows an individual to pay for their funeral in advance. The customer pays a set amount to a funeral provider either by way of a lump sum payment or by instalments. In return, the funeral provider agrees to provide or pay for that customer’s funeral on their death. These plans are generally bought by consumers that would like assurance that they will receive the funeral of their choice and to remove the financial burden of paying for a funeral from their loved ones.

James Hillman

James Hillman

Senior Associate

Government regulation of the pre-paid funeral plan sector is much needed given a number of the businesses that operate within it receive large sums of money from often vulnerable consumers and the contracts that underpin funeral plan arrangements including the trust deeds and insurance policies are often complex

The funeral plan provider would ordinarily set up a trust with independent trustees in which customer money should be held in order to meet the funeral costs of customers. Alternatively, the provider may acquire an insurance policy with the customer funds. In the case of Safe Hands Funeral Plans, the most high-profile funeral plan provider to fail in recent times, the provider fell into administration with insufficient funds to meet the funeral costs of all customers.

Sales of pre-paid funeral plans have significantly increased in recent years. Members of the Funeral Planning Authority – a voluntary regulator of the largest funeral plan providers – have over 1.6 million undrawn funeral plans and over 200,000 new funeral plans were sold to customers by its members in 2021.

Regulation of providers and intermediaries

In January 2021, the UK government legislated to bring all pre-paid funeral plan providers and intermediaries within the regulatory remit of the FCA with effect from 29 July 2022. This means that firms will need to be authorised by the FCA if they wish to provide or sell funeral plans from 29 July 2022. Failure to do so will constitute a criminal offence.

Various firms have applied for FCA authorisation and the FCA has been considering each application on a case-by-case basis. Certain funeral plan providers have either not applied for authorisation or have withdrawn their application, and it is anticipated that these firms will cease trading on or before 29 July 2022.

Financial Services Compensation Scheme and further legislation

The government has also announced that further legislative changes will be made to ensure that, from July 2022, the FSCS can operate effectively for the customers of pre-paid funeral plan contracts if an FCA-authorised provider fails. The FSCS is the government’s compensation scheme for customers of authorised financial services firms. If an FCA-authorised firm is unable to pay money owed to its customers, the FSCS can step in to provide compensation to that customer.

In April 2022, the government published its response to a consultation on the changes that it proposes to make to the way in which the FSCS will operate following the failure of an FCA-authorised funeral plan provider. These changes directly affect the role of an insolvency practitioner that is appointed as an administrator or liquidator of a funeral plan provider in a number of important ways.

Excluding insolvency practitioners from the requirement to be regulated in order to carry out funeral plans

The government proposes to amend the Financial Services and Markets Act (Regulated Activities) Order 2001 (RAO) so that, if a regulated funeral plan provider fails and its activities are temporarily taken over by an insolvency practitioner who is appointed as administrator or liquidator of the regulated provider, that insolvency practitioner is exempted from needing FCA authorisation to carry out the funeral plan contracts. This will allow an insolvency practitioner to temporarily trade a funeral plan business in order to achieve an orderly wind down of the provider’s operations.

Most liquidations tend to result in an immediate shut-down of the company’s business. However, the position is more complicated in relation to funeral plan providers where customers sadly pass away shortly following the liquidation and alternative funeral arrangements have not yet been made.

A duty for insolvency practitioners to co-operate with the FSCS

The government will place a statutory duty on insolvency practitioners to cooperate with the FSCS if the insolvency practitioner is appointed as administrator or liquidator of a regulated provider. The duty will require the insolvency practitioner to cooperate with the FSCS following a request to the insolvency practitioner by the FSCS aimed at securing continuity of cover or compensation for customers.

This duty of cooperation will only apply to the extent that the insolvency practitioner has adequate funding to cooperate and the FSCS would only be able to ask for assistance which it has “identified as being necessary”. This duty of co-operation will not override an insolvency practitioner’s existing statutory duties and liquidators will only be required to comply with the duty of co-operation if it is consistent with their functions under Schedule 4 of the 1986 Insolvency Act.

The government will also confer a power on the FCA to make rules enabling the FSCS to provide discretionary funding to the administrator or liquidator of a failed funeral plan provider, to meet costs that have been reasonably and exclusively incurred by that administrator or liquidator for the purposes of co-operating with the FSCS under this new duty. Such funding can be provided by way of payments to the failed funeral plan provider or by direct payments to the administrator or liquidator. It is anticipated to be a condition of FSCS funding that the administrator or liquidator does not otherwise have access to sufficient funds to meet the costs of co-operation.

Securing continuity of cover for customers

The government is keen to ensure that funeral plan contracts can be transferred efficiently between providers where it is appropriate to do so.

In that regard, it will confer a power on the FCA to make rules requiring or allowing the FSCS to make arrangements for securing continuity of cover for the customers of failed funeral plan providers.

This power would enable the FSCS to take measures (including making payments) to ensure continuity of cover by either enabling the transfer of the existing funeral plan contract to another FCA authorised provider, or by procuring a substitute funeral plan with another FCA authorised provider.

The government also intends to allow funeral plans to be treated as if they had been transferred by an existing provider to a new provider for regulatory purposes if reasonable steps have been taken by the existing provider to seek express customer consent to the proposed transfer but such consent could not be obtained within a reasonable period and the FCA has been notified of that fact.

Enabling the FSCS to seek recovery more effectively from the relevant trust assets and insurance monies for sums paid out to compensate consumers or in order to secure continuity of cover

Currently, if an authorised firm is unable to satisfy a consumer’s claims and the FSCS pays compensation to that consumer, the FSCS would ordinarily take an assignment of the consumer’s rights against the firm. This allows the FSCS to directly seek a recovery from the firm of compensation that the FSCS has paid out to consumers. However, the trust deeds and insurance policies underpinning funeral plan arrangements may not clearly or sufficiently set out the consumer’s rights, or the consumer may not have any rights at all to those funds.

To ensure that the FCA can make the necessary rules that will allow the FSCS to achieve a recovery from the trust assets and insurance monies underpinning funeral plan contracts, the government intends to confer a power on the FSCS to vary existing terms in trust arrangements or insurance contracts underpinning the funeral plans, in circumstances where taking an assignment of consumers’ rights does not enable the FSCS to achieve recoveries from the trusts or insurers.

Essentially, the FSCS would be able to amend the trust deeds and insurance contracts in a way that would allow the FSCS to claim or receive the funds held under the terms of these trust deeds or insurance contracts.

These are wholesale changes that are being implemented and it will be important for insolvency practitioners appointed over regulated providers to be aware of them and to strike the right balance between these regulatory duties and their wider duties to creditors of the insolvent provider.