Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2020
Baroness Penn
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2020.
Relevant document: 37th Report from the Secondary Legislation Scrutiny Committee
Baroness Penn (Con)
My Lords, this order, which we are here to discuss, brings prepaid funeral plan providers within the Financial Conduct Authority’s regulatory perimeter, subjecting them to compulsory, proportionate and robust regulation. This will ensure that consumers—often elderly and vulnerable—are adequately protected by proportionate but sufficiently robust regulation.
A funeral plan is a contract under which a policyholder makes one or more payments to a funeral plan provider, which subsequently provides or pays for a funeral on the policyholder’s death. Funeral plans allow consumers to “lock in” the price of their future funeral when they purchase a plan. Around 1.5 million plans are held by individuals across the country. Funeral costs have risen at almost twice the rate of inflation for the past decade, with the average funeral now costing between £4,000 and £6,000.
In recent years there have been reports from Fairer Finance and Citizens Advice Scotland of consumer detriment. In 2018 the Government launched a call for evidence, which confirmed that consumer harm exists in the funeral plan market. In particular, there is a lack of clarity for customers over what is covered by their plan; high-pressure and misleading sales tactics; and a lack of access to redress schemes if things go wrong. Some 84% of respondents to the call for evidence expressed support for a compulsory regulatory regime. Following further consultation, the Government decided to bring the prepaid funeral plan market within the remit of the FCA.
The funeral plan market has outgrown its 20 year-old legislative framework. Although a funeral plan contract is a regulated activity under the regulated activities order, the existing exclusions for plans covered by a trust arrangement or insurance contract mean that no prepaid funeral plan provider has ever been authorised and regulated by the FCA. The order removes those exclusions, requiring providers to be authorised by the FCA in relation to “entering into” funeral plans. The order also introduces a new regulated activity requiring providers to be FCA-authorised in relation to the administration of funeral plans, including existing plans. These changes will enable the FCA to introduce new rules to protect consumers at the point of sale; ensure that providers administer funeral plans properly; and ensure that providers have sufficient reserves to pay for funerals as they fall due.
Many funeral plans are sold by smaller intermediaries and third parties. Regulating this large part of the market is essential to protect individuals from the risk of unfair selling practices by companies that would take advantage of vulnerable customers. The order therefore amends the regulated activities order to make dealing in funeral plan contracts as an agent a regulated activity. This means that intermediaries or third-party distributors that promote or sell funeral plans will also be brought within the scope of the regulatory regime.
However, the Government are alive to the fact that many plans are sold by funeral directors, which are generally small to medium-sized family businesses and would not otherwise engage in financial services activity. To ensure a proportionate approach to these firms, the order amends the relevant regulations to allow them to become appointed representatives of principal firms. This means that funeral plan providers, acting as the principal firm, must ensure that the representatives they appoint to sell or promote their funeral plans comply with the relevant regulatory requirements, without these firms necessarily needing to pursue full FCA authorisation.
The order makes consequential amendments to the financial promotion order. It also brings the funeral plan market within the scope of the Financial Ombudsman Service and extends the ombudsman’s jurisdiction to complaints relating to matters that occurred when the relevant funeral plan provider was registered with the existing voluntary regulator, the Funeral Planning Authority.
I would like to acknowledge the work done by the Funeral Planning Authority. I hope that the FPA will continue its activities until the new FCA regime comes into force. The Government urge providers to remain registered with the FPA and continue abiding by its code of conduct during the transitional period. Having consulted widely with industry, the Treasury has concluded that most reports of poor activities can be attributed to those providers that have chosen not to register with the FPA. This demonstrates that a voluntary system of regulation cannot be fully effective because providers can choose not to comply.
It is a regrettable fact that bringing a previously unregulated sector into regulation—whatever form that may take—creates a possibility that some providers are unable to meet the threshold for authorisation. I therefore cannot rule out that, in authorising these firms under the new regime, it is revealed that some providers are unable to deliver on the promises they have made to their customers. I can assure the Committee that the Treasury and the FCA will monitor the situation closely and, subject to the facts at the time, stand ready—
Baroness Penn (Con)
My Lords, I will repeat my last sentence in case it could not be heard due to the Division Bell. I can assure the Committee that the Treasury and the FCA will monitor the situation very closely and, subject to the facts at the time, stand ready to take any appropriate action.
Once this order has been made, there will be an 18-month implementation period before the new regulatory framework comes into force. This will allow time for the FCA to consult on and implement the new regulatory framework, and for firms to familiarise themselves with those new requirements. The Government understand that the FCA will also consult on whether to extend coverage of the Financial Services Compensation Scheme to the sector. The Government are committed to working closely with the FCA on any legislative requirements to ensure that such an arrangement would work efficiently for consumers.
Compulsory regulation in this area is long overdue. Consumers should be able to make arrangements for this difficult time in life without fear of exploitation by disreputable firms. I beg to move.
Lord Empey (UUP) [V]
My Lords, I warmly welcome this order. It is perfectly fair to say that, in recent times, consumers have been bombarded by advertisements for these plans on television and radio and through other channels. As my noble friend said, people can be in a very vulnerable position in their lives when they are subjected to this pressure.
I would like to ask several things, in case I did not pick up some of the Minister’s comments. She made the point that some of the current operators may not be able to manage the new regulatory environment. What is the position for their policyholders, as it will be another 18 months before things are fully in place? What triggered the decision to push for this particular order? Was it the evidence of wrongdoing? Did the Government just decide to do so or did they receive a recommendation from the FCA in this regard?
While the Minister said that there were in the region of 1.5 million policyholders, can she give the Committee some sense of the amounts of money involved in this sector? It has grown exponentially in recent years. Also, what will the position be during the 18-month implementation period when people are still selling these policies, including perhaps a number of companies that will not be able to meet the requirements in the long term?
Clearly, markets change and evolve over time. We know this, but I am interested to know who is actually looking at it. When markets open up, perfectly good companies put forward policies. That is a great thing but, as the Minister has admitted, there are a certain number of people who are prepared to exploit. What is the position for companies that may not be in the United Kingdom but sell policies to it? In which regulatory environment will they operate, and what sanctions and security can be provided to consumers if they are not registered in the United Kingdom?
However, in broad terms, I welcome this order. It is overdue, as the Minister said. I hope that it will provide reassurance to a lot of people who perhaps currently find themselves holding policies that could still be vulnerable. It would be helpful if we could alleviate any further worry among those policyholders, particularly at a critical time in their lives.
Lord Davies of Brixton (Lab) [V]
My Lords, this is a no-brainer. Funeral plans are clearly a form of life insurance and, just like mainstream life insurance, they should be subject to full regulation. Promises are made to policyholders and we, as legislators, have an obligation to ensure that those promises are met.
We also have a duty of care. Funeral plans are mainly used by people on low incomes and with limited savings. Gold-standard independent financial advice will never be available to these prospective policyholders. They are inevitably on their own in an area that is potentially costly to them and where they have little knowledge, so regulations are required. I support what is proposed here today.
Provisions are required to provide protection for those who worry about being given a pauper’s funeral or concerned about it being a burden on their family after their death. However, the Committee needs assurance on some issues. I assume that there will be a time limit—maybe not now—but, given the time, I will limit myself to just two points.
First, we need assurance that the involvement of the FCA will not result in an inappropriate regime of supervision that would work against policyholders’ interests by unnecessarily increasing costs and limiting choice. The Minister was right to mention the work of the Funeral Planning Authority. It is a shame, therefore, that the Treasury does not appear to have made full use of its experience and expertise in this area. No doubt the Minister is aware of the detailed criticisms it has made of these proposals. I understand that a meeting with the authority is proposed but will the Minister assure us that the Treasury, and in due course the FCA itself, will take appropriate advantage of its undoubted expertise?
Secondly, it is important to mention the special needs of those religious communities—Jewish, Muslim and evangelical Christian—that provide funeral support for members of their own congregations. Such arrangements generally include a type of funeral plan that could fall under the order. I do not suggest that these plans should be disregarded for the purposes of the order. However, these arrangements are culturally significant, so will the Minister assure these communities that appropriate consideration will be given during the consultation to their special nature, both by the Treasury and by the FCA?
Lord Foulkes of Cumnock (Lab Co-op) [V]
My Lords, I thank the Minister most sincerely for a very helpful introduction. I must declare a couple of relevant interests as a former Labour and Co-op MP and as a former chair of Age Scotland. Both are, and indeed were, non-pecuniary interests. I know that that is an unusual thing in our House these days.
The Co-op Group and Age UK are major providers of funeral plans and are both members of the Funeral Planning Authority, but they do not support the FPA’s objections to the order. Indeed, the Co-op welcomed the announcement made in I think the Budget last spring that the Financial Conduct Authority would be given responsibility for the regulation of funeral plans, which the Minister outlined in her introduction.
I and the Co-op appreciate the FPA’s concern for the future of smaller providers. I think that the Minister dealt with that in her introduction. The Co-op also said, and I agree, that the primary concern is the protection of consumers. As has been said, FCA regulation is the only way to achieve that successfully. Similarly, my former colleague at Age Scotland, Mike Douglas, pointed out when I spoke to him that the FCA is particularly well versed in the important principle of treating customers fairly, which should be applied to these products.
I also pay tribute to the work of Citizens Advice Scotland. Someone asked who had raised the issue; it was Citizens Advice Scotland in the first instance in a report way back in February 2016. It has taken us more than four years to get to this stage.
I also understand that the Treasury consulted widely on these plans and that the Financial Conduct Authority will also do so in its implementation, as the Minister said.
I was going to ask the Minister only one question on when she expects the order’s provisions to be put into practice, but she dealt with that in her introduction and said that it would take 18 months. My question now is: why will it take that length of time? Can that not be sped up? The sooner we get this protection to people purchasing funeral plans the better. Otherwise I am very pleased to say that, for once, I support the Government’s order without reservation.
Lord Mann (Non-Afl)
My Lords, I also congratulate the Minister on the eloquence of her introduction and the Government on bringing forward this timely statutory instrument. I suppose I should declare an interest of sorts in that I am almost certainly the only qualified gravestone topple tester in Parliament. I have taken quite a significant interest in all matters relating to funerals, particularly burials. The need to regulate on this was raised under previous Governments with less success.
The kinds of people who plan for funerals in this way are very identifiable. Over the years, I have met and discussed the issue with many of them. They are easily recognisable: they are the kind of people who live in tidy houses, with tidy gardens. They volunteer; they will be volunteering to assist with Covid and matters relating to vaccinations. They are the bedrock of everything decent about the country. These people care about everything around them and, therefore, care about leaving everything in order when their time has gone. That motivation means that people tend to utilise such a service. The danger is that they perhaps place too high a value on it, and the mis-selling of the wrong or wrongly priced product has long been a concern. The beauty of the order is that any complaint about that, whenever it comes—by definition it could sometimes be made by someone from another generation rather than from the person who contracted the service—will shift the market towards good provision.
I have seen too many cases of trauma, usually when a husband dies leaving a wife or vice versa, when a funeral plan does not meet expectation. They had no idea that was going to happen. A lifetime of careful budgeting, of caution and living in a proper, very British way, as they would see it, blows up in their face. That is the importance of this, well beyond the appropriate, standard regulation of a financial product in a market. This is important in terms of the ethics of the country. The change it makes in cases where things go wrong, and the ability to do something about it, is disproportionately significant for the people impacted. I therefore thank the Government and the Minister for bringing this forward.
Baroness Bowles of Berkhamsted (LD) [V]
My Lords, as other noble Lords have mentioned, around 2016 and 2017 there began to be reports about the mis-selling of funeral plans. The concern mainly focused on the plans not covering the cost of a funeral, the magnitude of fees taken by introducers and plan providers, and the inflexibility of plans and cancellation costs. The concerns have also come to light during a period when funeral costs have escalated, with elderly individuals being sold plans based on spiralling costs. Those costs are not inevitable—indeed new, cheaper funeral arrangements are now coming to market.
At times, the hard sell takes place door to door, but the pressure to make funeral provision is all around in advertisements. Even when this is from good providers, it adds to pressure for people to “do something” and spare their hard-pressed family from financial concern at a time of distress, making them easy targets.
Like other noble Lords, I have received the brief from the Funeral Planning Authority, and I thank it for the work it has done. I recognise that the new authorisation arrangements are an existential threat to it. That seems to be acknowledged in paragraph 12.2 of the Explanatory Memorandum, which says that the regulatory cost will be partially offset by the fees that the majority of providers currently pay to the existing voluntary regulator.
The current terms for the FPA are to give 180 days’ notice, which means that the FPA may well cease before the FCA becomes responsible; it might not hang out for the 18 months if it has people resigning. What effect does the Minister think that will have? Will it make for some kind of lacuna?
The FCA will establish an authorisation procedure to commence in summer 2022 and will consult in spring this year. There’s the rub: we really do not know what it will do. It will all depend on that consultation. The only information at present on the FCA’s website is that it will look at outcomes, ensuring that consumers get the product paid for, and that
“funds are looked after and used responsibly.”
I await with interest how that will roll out. For example if funeral costs become more competitive, would funds being used responsibly prevent paying over the going rate at the time and even result in a cash payment, or is that merely a statement about the prudential soundness of the provider? Does it extend to blocking excessive fees? The problem is that we do not yet know any significant detail.
At present, all providers have to use a trust or an insurance policy, otherwise they would already come under FCA regulation, so what other kind of prudential supervision does the Minister envisage and where has it gone wrong such that it is not sufficient? Or do all the problems lie with the selling side, such as the pressures, commissions and descriptions? If that is the case, it is a little disappointing that the FCA site does not say something about sales conduct, other than getting the product paid for.
The SI removes the regulatory exemption for having funds in trust or an insurance policy so that everyone becomes regulated. At the same time, that seems to open up other forms of prudential security. I wonder what the effect of that will be. In the light of the FCA website comments, does it mean an expectation that funds will be invested and secured differently?
Of course we will let the SI proceed and I broadly welcome it, but I share some of the reported concerns. Like so much of the delegated powers we give to our regulators, the fact is that we really do not know what will happen, where the improvements will be or what we can do if they are insufficient. We of course have confidence in the FCA, but it is built entirely on that. We have no assurance in the SI or in any direction to the FCA that aggressive door-to-door sales must cease. The Treasury has made some provision, with the financial ombudsman taking over the role of dispute resolution, which would have been done by the FPA, but it is not really a satisfactory vision of the future. I would be far happier if there had been more specific guidance to the FCA about those things that have to stop, such as unreasonable fees, profiteering and door-to-door selling.
I heard what the Minister said in introducing the SI about regulation at the point of sale. That is good, but will it really stamp out bad practice? As the Minister said, it is only the 5% who have not taken up the voluntary authorisation. How easy will it be to find that and reduce it to zero?
Lord Tunnicliffe (Lab) [V]
My Lords, I am grateful to the Minister for introducing the order. As she outlined, it amends the regulatory framework for providers of prepaid funeral plan contracts, generally requiring them to be authorised by the Financial Conduct Authority. Intermediaries need not be directly authorised but will be expected to become appointed representatives, who are essentially overseen by an FCA-registered provider.
The provisions appear to offer a sensible conclusion to the consultation exercise launched back in 2018. We will certainly not oppose the order, though I would like clarity on a number of points.
The majority of providers act responsibly and sympathetically, and, for many, a prepaid funeral plan offers peace of mind. It is no surprise that the market has grown in recent years; it is perhaps more surprising that it has taken so long for the 2001 regulatory framework to be revisited. As the supporting documentation notes, the current voluntary regulatory system has not delivered the desired level of consumer confidence. We hope that the order sends a message to any unscrupulous actors that their behaviour must change. The ability to refer cases to the Financial Ombudsman Service is a particularly important inclusion. I hope the Minister can assure noble Lords that the department will follow early cases to ensure that the new regulatory regime has the desired effect.
Can the Minister offer any insight into how problem cases may be resolved under the new regime? If a provider or intermediary is judged to have fallen short of the FCA’s requirements, for example, will the funeral package remain valid with another player assuming responsibility for delivery? Those who have taken the time to spell out their wishes will want them honoured. If their plan were to be cancelled and a refund issued, it would be not only inconvenient but a potentially traumatic experience.
The Explanatory Memorandum and the information paragraphs in the 37th report of the Secondary Legislation Scrutiny Committee note that the new regime will not be fully in force until 18 months after the order is made. It clearly makes sense to give both the FCA and providers time to flesh out the detail and adjust to the new reality. However, can the Minister confirm what steps, other than those outlined in paragraph 2.3 of the Explanatory Memorandum, will be taken to prevent vulnerable customers being targeted or pressured into signing agreements in the interim period? Can she also confirm whether the Government plan to formally make this order shortly after the Commons has considered the draft on 13 January, or is there likely to be a delay to allow the FCA more time to begin its consultation?
Finally, could the Minister please outline the rationale for explicitly excluding local authorities from the regulated activities? I am not aware of local authorities clamouring to offer such services, but what if a specific need were to arise in a particular locality?
Once again, I thank the Minister and her department for introducing the order. I look forward to her response and, all being well, the FCA launching its consultation in due course.
Baroness Penn (Con)
My Lords, I am grateful to all noble Lords who contributed to the debate and for their support for this measure. The noble Lord, Lord Empey, asked what triggered the Government’s decision to act in this area. As other noble Lords noted, there had been reports on issues with this sector by Citizens Advice Scotland and Fairer Finance. The Government conducted their own call for evidence, which also found evidence of consumer detriment and triggered government action.
The noble Lord also asked about the amount of money involved in the sector. There are 1.5 million undrawn plans, equating to approximately £4.3 billion in assets under management.
The noble Lords, Lord Foulkes and Lord Tunnicliffe, asked about implementation. I fully expect the Government to make this order shortly after the Commons has considered the draft. The 18 months for implementation include time for the FCA to consult on the requirements that it will put in place. I assure the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Bowles, that, once a new regime is in place, the Treasury and the FCA will work closely to ensure that it is having the desired effect.
The noble Lord, Lord Empey, asked about firms outside the UK selling to UK consumers. I assure him that the relevant regulated activity refers to plans for the provision of a funeral in the UK. The fact that a provider is based outside the UK does not necessarily mean that the regulated activity will not be deemed to be carried out in the UK, and therefore subject to UK regulation.
The noble Lord also asked for reassurance about the impact of these regulations on specific religious requirements for burials and their provision by religious groups. The regulated activities order clearly defines what is meant by a funeral plan contract. This definition may not capture the arrangements of religious bodies. Further, the regulation applies only to persons carrying out regulated activities by way of a business.
As regards the potential for disreputable conduct by firms before the FCA’s compulsory regime comes into force, I again strongly encourage all funeral plan providers to remain registered with the FPA during the transition period and to continue following its code of conduct. I also urge consumers purchasing funeral plans to choose providers that have registered with the FPA. This will provide some level of protection and, in future, the benefit of access to the Financial Ombudsman if something were to go wrong.
The noble Lords, Lord Empey and Lord Tunnicliffe, asked whether I could provide any insight into how problem cases may be resolved under the new regime—for example, where the provider of an existing plan does not get authorisation under the new regime. The noble Lord, Lord Tunnicliffe, is absolutely right that the preferred solution in this situation, where a funeral plan provider is unable to meet the threshold for authorisation or chooses not to continue in the market, will be for the transfer of its business to another provider that has successfully obtained FCA authorisation. Legislation does not prescribe the terms of any such transfers that may be undertaken in a way that preserves the consumers’ underlying benefits, such as their choice of funeral director or services provided.
The noble Lord, Lord Tunnicliffe, also asked for clarity on the exclusion for local authorities. During its consultation exercise, the Treasury found no evidence of harm from prepaid funerals sold by local authorities. The Government therefore consider that it is not necessary to bring them within the scope of the FCA regulation. However, they can continue to provide this service should they wish to. The order simply excludes them from the regulatory remit of the FCA.
The noble Lord, Lord Davies, asked for reassurance on the role of the FCA, as did the noble Baroness, Lady Bowles. The FCA has a reputation for being an effective regulator and its experience of conduct and prudential regulation, alongside its extensive rule-making powers, will provide a solid basis for strengthening the regulatory framework for funeral plans. The Financial Ombudsman Service has experience of dealing with a wide range of types of complaints and was supported by a majority of respondents to the Government’s consultation. Taken together, the FCA and the Financial Ombudsman Service will provide consumers with an effective and enforceable regulatory regime, and an effective dispute resolution mechanism. I thank the noble Lord, Lord Foulkes, for his support of the FCA’s role in regulating this sector and provide reassurance to the noble Lord, Lord Davies, that the Treasury and the FCA have consulted, and will continue to consult, on the details of these regulations and the rules made under them. They will, of course, draw on the important advice of the FPA.
The noble Baroness, Lady Bowles, asked about the ongoing role of the FPA. As I said, it is my hope that the FPA will continue until the new regulatory regime comes into force and that providers will remain registered with the FPA, enabling it to continue functioning. I believe that these regulations are a welcome move to regulate a sector that is overdue for them.
The Deputy Chairman of Committees (Baroness Henig) (Lab)
That completes the business before the Grand Committee this afternoon. I remind Members to sanitise their desks and chairs before leaving the Room. The Committee is adjourned.