Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2020

Baroness Penn Excerpts

Wednesday 6th January 2021 Grand Committee

Moved by

[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—

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[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.

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[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.

Motion agreed.