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

John Glen Excerpts

Tuesday 19th January 2021 General Committees

[The Chair]

Before we begin, I remind Members about the social distancing requirements. Spaces available to Members are clearly marked. Hansard colleagues would be grateful if you could send any speaking notes to [e-mail]. I call the Minister to move the motion.

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2020.

It is a pleasure to serve under your chairmanship, Mr Mundell, as we consider the order, which was laid before the House on 26 November last year.

At the spring Budget in 2020, following comprehensive consultation and stakeholder engagement, the Government published their consultation response and the Chancellor announced the Government’s intention to legislate to bring pre-paid funeral plan providers within the remit of the Financial Conduct Authority. That will ensure that, for the first time, all providers that sell and administer pre-paid funeral plans will be subject to compulsory and robust regulation. Compulsory regulation in this area is long overdue, and it is right that the Government act to ensure that vulnerable consumers are protected by a coherent and proportionate regulatory regime.

This issue has attracted interest from across the House over a number of years and I thank all Members who have campaigned, spoken and written to me about it in that time, including the hon. Member for Airdrie and Shotts (Neil Gray), the right hon. Member for East Antrim (Sammy Wilson), my hon. Friend the Member for South Cambridgeshire (Anthony Browne), my right hon. Friend the Member for South Holland and The Deepings (Sir John Hayes), and the hon. Member for Bethnal Green and Bow, who is a member of the Committee. The order will introduce a compulsory regulatory regime by amending the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, and other related legislation.

A funeral plan is a contract under which a policyholder makes one or more payments to a funeral plan provider, who subsequently provides or pays for a funeral upon the death of the policyholder. Entering into such plans in effect allows policyholders to lock in the price of their future funeral when they purchase the plan. Although there is a voluntary regulatory body in the market, the Funeral Planning Authority, over recent years there have been troubling reports from Fairer Finance and Citizens Advice Scotland of consumer detriment in the sector.

Following those reports, in 2018 the Government launched a call for evidence in order to seek views and information on the potential risk of consumer detriment in the market. The responses to that call for evidence confirmed the existence of consumer harm, which included a lack of clarity for consumers 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. The call for evidence also confirmed broad demand in the sector for moving to a compulsory regulatory regime, with 84% of respondents expressing their support.

Following further consultation on a new legislative framework, the Government have decided to bring the pre-paid funeral plan market within the remit of the FCA. That will ensure that funeral plan providers are subject to robust and enforceable conduct standards that aim to protect consumers from further harm. Under the current legislative framework, entering into a funeral plan contract is a regulated activity; however, the 2001 order currently excludes plans covered by a trust arrangement or insurance contract from the definition of a funeral plan.

Because all known providers meet those conditions, no pre-paid funeral plan provider is currently, or ever has been, authorised and regulated by the FCA. The draft order will remove those exclusions, with the effect that providers will generally be required to be authorised by the FCA in relation to entering into—that is, selling—funeral plan contracts. The order will also introduce a new regulated activity that will require providers to be authorised by the FCA in relation to the administration of funeral plans, including existing plans.

Those changes to the 2001 order will ensure that the FCA is able to introduce rules to protect consumers at the point of sale, ensure that providers administer the plans properly, and ensure that they have sufficient reserves to pay for funerals as they fall due. Many funeral plan contracts are sold by smaller intermediaries and in particular by funeral directors, a point made to me yesterday in a letter from my right hon. Friend the Member for South Holland and The Deepings. Failing to capture the sale of funeral plan contracts by that large part of the market would result in an ineffective regulatory regime and expose individuals to the risk of unfair selling practices. Therefore this order also makes amendments to the regulated activities order in order to make dealing in funeral plan contracts as an agent a regulated activity. The effect is that all relevant activities undertaken by intermediaries or third-party distributors who promote or sell funeral plans will also be brought within the scope of the amended regulatory regime.

I am mindful that funeral directors are in general not financial services firms, and the Treasury has received many representations from stakeholders concerned about the ability of these small, often family-run businesses to become directly authorised by the FCA. Therefore this order amends the relevant regulations in order to allow intermediaries of funeral plan providers to become appointed representatives of “principal” firms. That means that funeral plan providers, acting as the “principal” firm, must ensure that the representatives whom they appoint to sell or promote their funeral plans comply with the relevant regulatory regimes. For the Committee’s benefit, I point out that that is not dissimilar to a travel agent selling insurance but not actually being responsible individually for being regulated as an insurance provider. It results in a proportionate approach whereby smaller firms that operate as intermediaries will be required to follow the rules that protect consumers, without necessarily needing to undergo full FCA authorisation.

The order also makes consequential amendments to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001.

Finally, the order will bring this sector into the scope of the Financial Ombudsman Service. The Government consider that consumers should have access to the financial ombudsman in respect of both plans purchased after the order comes fully into force and plans that would otherwise have benefited from the complaints procedure of the current voluntary regulator. Accordingly, the order extends the jurisdiction of the financial ombudsman to allow it to deal with complaints in relation to matters that occurred when the funeral plan provider was registered with the Funeral Planning Authority.

I thank the FPA for its work up to this point. I hope that it will continue to operate until the new FCA regime comes into force and I urge providers to retain their registration and, of course, abide by the authority’s code of conduct in this transitional period.

Following consultation with the industry, the Treasury has concluded that the majority of providers operating in this market are well run, with properly funded trusts. That is important, because it provides a foundation on which a proper regulatory regime can be based. The Treasury has also found that the reported poor practices have largely been attributed to providers that had chosen not to register with the FPA, demonstrating that in this case a voluntary system of regulation cannot be fully effective because providers can simply 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 not able to meet the threshold for the new authorisation. I therefore cannot rule out the possibility that, in the authorising of those firms under the new regime, it is revealed that some providers are unable to deliver on the promises that they have made to their customers. However, 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.

I will briefly outline the next steps. Once this order is made, there will be an 18-month implementation period before the new regulatory framework comes fully into force. That will allow time for the FCA to design, consult on and implement the regulatory architecture for the new regime. It will also allow time for funeral plan providers and intermediaries to take the necessary steps to familiarise themselves with the new regulatory requirements.

I also fully expect funeral plans to be brought within the scope of the Financial Services Compensation Scheme, but ultimately the scope of the FSCS is determined by the FCA, which will need to consult on the matter. The Government are currently considering whether further legislation is required to ensure that the compensation scheme would operate effectively for consumers if it were extended to cover this sector.

As I said, compulsory regulation in this area is long overdue. We must ensure that vulnerable and elderly consumers in this sector are protected. I therefore commend this order to the Committee.

--- Later in debate ---

[John Glen]

I am very grateful to the right hon. Gentleman for his thoughtful remarks. I echo his sentiments about the contribution that funeral directors make up and down the country, in very difficult circumstances over the recent period. I understand the trauma that exists out there and it is obviously incredibly challenging to enact regulations that are appropriate but still cause massive distress. He raised a number of substantive points, which I will happily respond to. Obviously, we did not start out seeking to regulate at any cost and without due consultation. I accept that the number of responses was relatively modest, but there was a clear consensus from them.

I acknowledge the points that the right hon. Gentleman made on behalf of the existing voluntary body, the Funeral Planning Authority, which is not in favour of the regulation, but the reality, as I said, is that for many of its members this is not an issue; the issue comes with those that do not choose to register with the FPA and the burden of distress that those firms cause. That is why we are having to act.

The right hon. Gentleman asked about the costs for small firms. I explained the model by which small firms will be able to act as essentially intermediaries in terms of selling these products, and the relationship with the FCA not being a direct one. I accept that the issue about current providers and plans that would, subsequent to the authorisation process, potentially not be authorised, and the attendant consumer detriment, is a legitimate one that we cannot resolve at this point. As I said, it is a matter that the FCA would keep under review. I accept that the issue exists, but that does not mean that we should not tackle the fact that we need to regulate going forward, and we need to regulate for those that have come before.

The right hon. Gentleman asked about FCA resourcing, which is obviously a matter for the FCA to resolve. Notwithstanding the challenges that it faces at different times with different issues, it has a good reputation for doing this sort of work, and we expect to work very closely with it. I have regular conversations—indeed, I will have one today—with the chief executive of the FCA, and I will keep the matter under close review.

I think this is the right thing for the Government to be doing. It is based on evidence, cross-party support and clearly, as matters move forward and the detail of the work and the regulations come into play, there will be an opportunity to debate the measure further in the House.

Question put and agreed to.