Regulation often proves a headache for financial advisers, swallowing up significant time and resource. However, events earlier this year highlighted why it’s so important.
In March, a large funeral provider fell into administration, leaving its 46,000 customers worried about whether their prepaid plans would be honoured or refunded. Some eight months later, and many remain in the dark.
The firm in question, ironically named Safe Hands, was one of many companies operating in a sector that was previously unregulated.
The absence of adequate market supervision meant Safe Hands’ customers were not sufficiently protected. Thankfully, this has now changed.
On 29 July 2022 prepaid funeral plans became regulated by the Financial Conduct Authority (FCA). This means that 26 providers offering approximately 1.6 million plans - which make up 87 per cent of the whole market - are now under the FCA’s authorisation remit.
Prior to this, a professional body called the Funeral Planning Authority (FPA) oversaw the sector, but its operations ceased once the FCA assumed regulatory control.
With this change in mind, let’s examine whether funeral plans are worth offering as part of the holistic financial planning service you provide to your clients.
As the plight of Safe Hands underscores, this is welcome news for those who’ve taken out prepaid funeral plans in the past or intend to in the future.
The FCA says regulating funeral plans will encourage providers to raise their standards, giving consumers more protection should things go wrong. There are already several new rules that funeral plan providers must follow. These are:
A ban on cold calling – companies who make unwanted and unsolicited phone calls about funeral plans could face heavy fines.
A ban on commission payments to those who sell funeral plans, such as funeral directors – the FCA says the aim here is to ensure products offer “fair value”.
A requirement for the plan to deliver a funeral unless the customer dies within two years of inceptions, in which case a full refund must be offered.
There are further benefits, too. Customers of authorised funeral plan providers now have access to the Financial Services Compensation Scheme, which means their money is protected should their funeral plan provider fail.
In addition, consumers can now file a complaint to the Financial Ombudsman Service. This applies even if the issue in question happened before July 2022 as long as the firm was registered with the FPA at the time the problem occurred.
In a word, no.
A number of firms have decided to exit the market, while others have so far opted against applying for authorisation. The FCA says these firms can continue administering existing funeral plan contracts until 31 October without being authorised, but they aren’t allowed to sell new ones.
Further to this, there are handful of providers who’ve applied for authorisation but don’t have any existing plans and aren’t currently selling new ones. The FCA warns that consumers shouldn’t buy a plan from these firms unless they become authorised in the future. Any authorised firms will appear on the FCA’s register.
Emily Shepperd, Executive Director of Authorisations at the FCA, shared her views on the situation: “It is unfortunate that a number of firms chose to exit the market, leaving customers, who had sought peace of mind for their loved ones, understandably worried.
“It is a good outcome for consumers that some providers have stepped in to provide funerals for the customers of these providers at short notice. We also continue to engage with the industry while it works on a longer-term solution.”
While funeral plans aren’t, and will never be, the bread and butter for advice practices, it’s worth walking through how they work so that you can support your clients in this area should they enquire about it.
In its most basic form, a funeral plan allows people to pay for their funeral upfront to relieve loved ones from footing the bill.
The big benefit with prepaid plans is that you can pay for their funeral at today’s cost. For instance, a client pays £4,000 for a funeral plan, and dies 10 years later when, due to inflation, the cost of an equivalent plan has risen to £7,000. As they’ve paid for the plan upfront, their surviving family members won’t be asked for the extra £3,000.
Consumers can either buy one from a funeral plan provider or directly from a funeral director, and have the option to pay in instalments or with a lump sum. The latter tends to be the most cost effective as there are no interest charges.
How much the plan costs will depend on what sort of funeral they wish to have. Providers offer plans with various levels of comprehension, enabling your clients to make an off-the-shelf choice.
The most basic plans typically cover burial or cremation but little else, while the most comprehensive plans often include luxury items such as limousines.
Research from Sunlife, the insurance company, found that the average cost of dying is £8,864, with the average cost of a basic funeral just over £4,000.
This ranges from £1,700 for a direct cremation – where there is no service, mourners or ceremony – to £5,000 for a burial. A standard cremation sits in the middle with an average cost of £3,765.
Location can also affect cost. Unsurprisingly, at £5,358 London is the most expensive place to die, while the cheapest is Northern Ireland with the average funeral costing just over £3,000.
Prepaid plans aren’t the only means of paying for a funeral. Let’s look at a couple of other options:
Using money in savings is a common approach. One potential drawback is that before estate executors can access these funds, they generally must wait until grant of probate is issued, which can take several months.
However, some providers and banks may allow the executors to access the deceased’s savings to fund funeral costs, with this amount deducted from the estate’s final value. It can be beneficial for your clients to designate a specific account for funeral costs, accompanied by a note in their will confirming their intentions for those funds.
2. Life insurance
A whole of life policy in trust is a further option, though as you’ll be aware these can be expensive. Additionally, if investment growth is needed to reach the required payout, they could be left with a shortfall if reversionary and terminal bonuses are lower than expected. If your client also has an inheritance tax problem and is looking to cover the bill using a whole of life plan, you could allocate a portion of this plan towards paying funeral costs.
Although the regulation of funeral plans will broaden the service you can provide to you customers, you may find that the alternatives laid out above remain your preferred option.
In any case, it means that consumers who opt for the prepaid funeral plan route will be better protected, and that’s a good thing.