4 March 2021
FCA prepares to clean up the funeral plan market
The FCA finally published the first draft of its plans to regulate the funeral plan industry this week - kicking off the final stage in what has been a long road to get better protection for consumers in this market.
Fairer Finance launched its campaign to get the sector regulated in 2017 - after uncovering evidence of high pressure sales, poor products, high fees and a lack of security for customers' money.
Although the Treasury stated its intention to regulate the sector back in 2018, the necessary legislation ended up caught in the Brexit traffic jam - and was only recently laid.
The FCA had obviously been working hard in the background, as it made fairly swift work of publishing its consultation on the new regulations. And the good news is that the draft rules contain all the right ingredients to eliminate the worst practices in the sector.
Crackdown on commission and fees
As well as including all the obvious benefits of FCA regulation - such as protection for customers' money via the Financial Services Compensation Scheme and access to the Financial Ombudsman Service - the FCA also added in some tough measures around commission, instalment plans and fees, which may have caught some in the sector off guard.
The FCA plans to ban commissions for funeral plan intermediaries entirely, a bold move that will do a lot to remove some of the worst players from the sector. Some funeral plan companies will pay up to £800 commission for sale of a plan. Indeed, I regularly get emails from companies asking me if I'd like to get in on this game (I'm not sure they've cottoned on to what we do!). Given that the average plan costs between £3,000 and £4,000 - consumers are clearly not getting good value from that arrangement.
The new rules also include plans to ban instalment plans - unless they convert to fully paid up plans if the customer dies before they have finished paying their instalments. Of the plans that we rate, only around half of those that offer instalment options provide a fully paid up plan if the customer dies before completing payments.
The FCA has also said it will clamp down on fees, transferring its rules from other sectors which only allow you to charge additional fees which are proportionate to the costs. That means cancellation fees will need to fall.
When we first looked at the sector in 2017, we found some firms charging cancellation fees of as high as 20% of the plan value - which could have amounted to over £700. Even Dignity, one of the largest firms in the market, was charging almost £400 to cancel.
Since then, the majority of large firms have cut their cancellation fees significantly - with Dignity, Co-op and Golden Charter all at around £250. But a number of smaller firms still charge cancellation fees that can run into the hundreds, and even thousands of pounds.
Capital Life, for example, still charges 20% - which on its most expensive plans works out at a four figure sum.
Still a long way to go
The only downside to the FCA's latest paper is that regulation is still some way off. The new rules will not come into force until July next year - over four years since the Treasury announced its intentions to regulate the sector.
But the new framework looks robust - and should be effective at driving out some of the poor standards in the sector, while encouraging other established financial services players to consider entering the market.