Advisers who have taken out pre-paid funeral plans for clients may need to check what protections are offered by their providers after the Financial Services Compensation Scheme (FSCS) confirmed it will not cover failed firms.
While some providers will be signed up to a set of industry standards which would protect client money, other funeral plan providers will not have done this, leaving clients high and dry in the event the firm goes out of business.
It is a requirement of the Funeral Planning Authority (FPA), which is an industry organization not a regulator, that registered firm keep client money protected in an independent trust fund or through a whole of life insurance policy.
So what should advisers be looking for when setting up a funeral plan for clients?
What is the scope of the FSCS?
While funeral plan providers can be regulated by the Financial Conduct Authority (FCA), many use exemptions. However, even a plan bought by an individual from a regulated funeral provider would not be covered by the FSCS. This is because products are not categorised as a ‘designated investment’ under the FSCS’s compensation rules.
Funeral plan providers rely on insurance companies and investment trusts to meet their obligations to consumers. In some instances where a whole of life policy provider, or a provider of a product held within a trust, goes bust, the FSCS may be able to pay out to the funeral plan provider or the trustees.
The funeral plan provider or trustees of the investment fund would then decide what to do with that compensation, and the FSCS is not responsible for that decision.
James Daley, managing director of consumer group Fairer Finance, said he was pleased the FSCS had clarified the scope of its coverage.
He said: ‘The fact remains no funeral plan customers have recourse to FSCS if their plan provider was to become insolvent. Yet most people think funeral plans are subject to the same regulation and consumer protection as general insurance products.’
Due diligence and the Funeral Planning Authority
When choosing a funeral plan provider, there are several key questions advisers should be asking to ensure the best outcome for clients, according to Mark Moran, director of intermediary sales at funeral plan provider Golden Charter.
Firstly, using a Funeral Planning Authority (FPA) registered plan provider means problems can be escalated to the FPA, which offers support in resolving them. FPA registered firms also adhere to stringent conditions on how they deal with plan holders’ money, among other rules.
Moran said: ‘FPA rules require that registered plan providers do not hold the money themselves, but keep it protected in an independent trust fund or through a whole of life insurance policy.
‘Things to consider when choosing a plan include whether the trust publicly reports on its growth and how it is managed, either online or in print.’
Moran also recommends investigating the size of the trust, its assets to liabilities ratio, and how much is set aside for each plan.
Key to the plan provider’s value is whether funeral directors will accept their plans in the client’s local area. It is therefore important to ask a provider which firms they work with to ensure there is comprehensive coverage available nearby.
But perhaps even more important is determining whether a client’s plan is allocated to a specific funeral director upon being taken out.
Moran explained: ‘Waiting until the time of need to allocate a plan to a funeral director leads to uncertainty.
‘The family would not have any advance knowledge of which funeral director would be looking after their loved one, the preferred or nominated funeral director may not accept the plan or may request further payment to cover the costs of the services included within it, and the distance to travel may be an issue.
‘Using a provider that allocates the plan to a funeral director as soon as it is taken out means there is a binding contract in place with that funeral director.
‘This ensures that families are given the information they need up front, they can be clear on what they are receiving, and they are ultimately given peace of mind in knowing exactly who will be carrying out the funeral when the day comes.’