I’ve never been a fan of funeral plans. Or, come to that, funeral directors. Last year two regulators stepped in to tell the industry to clean up its act. First the CMA told undertakers to show their prices clearly and in a standard format so customers could compare one with another. A warning there perhaps for financial advisers many of whom do not show their prices at all, never mind clearly and certainly not in a standard format. It also banned firms from giving backhanders to hospices or nursing homes which passed grieving relatives on to them. These so-called ‘sunlight remedies’ began last September.
A couple of months earlier the FCA had stepped in to say that in a year it would regulate firms that provided funeral plans. These take thousands of pounds off people now to pay for their funeral after they die. Nearly 200,000 are sold each year with an average price of more than £3,000 and 1.6 million are live.
An FCA matter
But from 29 July 2022 this multibillion-pound industry will be regulated by the FCA. With less than five months to go the latest figures from the FCA (8 March) show 20 of the 65 providers have not applied for regulation and three others have withdrawn their application. I understand that was on advice from the FCA that it would reject them. So far none of the 42 submitted applications has been approved.
It is still not clear what will happen to the tens – possibly hundreds – of thousands of customers of these 23 non-regulated firms which will have to cease trading by 29 July. Ideally, they will sell their book to a bigger provider. The FCA told me it is working hard to make that happen.
Latest figures from the FCA show 20 of the 65 providers have not applied for regulation, while three others have withdrawn their application.
One large provider, Dignity, said in February it was working with the FCA to “minimise potentially negative consequences on customers” though details remain unclear. Customers of unregulated firms which are not rescued could lose some or all the money they have paid in. It should be held in a trust but the Treasury and the FCA fear that poor financial management of these unsupervised trusts could mean there are insufficient funds leading to “poor outcomes for consumers if firms fail”. Even a well-run trust will have to pay the cost of early redemption of investments which were timed to meet withdrawals as customers died. One industry expert told me customers could get back as little as 50% of the money they paid in.
A fundamental failing
Funeral plans have always been a bad idea. People pay money now on the promise that after they are dead – and can no longer bring a complaint – their grieving relatives will be presented with the funeral they wanted, pre-paid. Except it often did not work out like that. The FCA found that the plans were poor value for money and did not guarantee a suitable funeral fully paid for when the planholder died. These plans were sold through cold calling and high-pressure sales, which will both be banned from 29 July. The FCA will also ban commission payments to agents who introduce customers. Perhaps a sign of things to come for other financial products.
Funeral plans have always been a bad idea. People pay money now on the promise that after they are dead their grieving relatives will be presented with the funeral they wanted, pre-paid.
They are a bad idea for another reason, regulated or not. If an estate is worth anything over a few thousand pounds then the deceased’s obsequies are the first call on that money so they are paid for anyway. If someone does not leave enough to pay for a funeral then chances are they cannot afford to pay for it in advance even through an ‘easy’ instalment plan. Any decent relative would want them to spend their limited income on as good a life as they could afford while they lived.
There is third consideration. Funerals are for the living not the dead. So the living should choose how to send the dead off. A funeral plan takes that freedom away from them and extends financial control over a spouse or children beyond the pre-paid grave. In life that is called coercive control.
Paul Lewis is a financial journalist and host of Radio 4’s Money Box
Hear, hear Paul.
Do the Treasury and the FCA have any evidence that Funeral Plan-related trusts are poorly managed? Have any yet defaulted on their obligations?
I always fail to understand why a funeral costs so much. OK if you are going to be buried in hallowed ground with a fancy headstone, but plenty of people get cremated and have their ashes scattered. So, the crematorium is gas fired. So, with the cost of gas and the brief facilities why would it cost more than £1,000 to £1,500? Show me some figures.
As to the remark that some IFAs don’t show their prices. Well, you could show typical prices, but show me a typical client. I always waited until the potential client told me (at the fact find stage) exactly what he/she wanted me to do and then I quoted for the job. That I was never turned down (and I was charging fees well before RDR) and worked on the old John Lewis principle – ‘Never knowingly undersold’, rather points to a satisfactory method all round. The client always had the opportunity to walk away before any work started and there were no surprise bills. The price quoted was adhered to, if it transpired that more work was involved than originally envisaged, then that was my hard luck. (Unless of course the client added extra tasks)
Funeral Plans are economically poor value. But they do appeal to some (to me inexplicable) element of human nature. The FCA cannot get their head around the irrational consumer.
However, whilst some “actuarial” supervision might be useful to identify potential shortfalls in funding, bringing in the whole edifice of the FCA is just not the right solution.
If we look at Nutmeg and note that with an average pot size of £25K it simply could not turn anywhere near a profit. £125 in charges per year didn’t buy a lot of admin, postage, investment management skill and of course, the cost of meeting the regulatory and compensation system budget.
So ratchet that down to a product that might average £5K if we are lucky and you just cannot price in enough loading for the inevitable regulatory impost. They want solvency capital to be provided to any trust and given that this is a one way bet against you, providers of such capital want a high return. This sort of capital costs 15-20%pa. On a regulatory capital requirement of, say 10%, this is an annual charge of 2%pa before you even get down to everything else.
This regulatory move looks to be cynically designed to make it impossible for this market to exist, in much the same way as Life Settlement Funds were dismantled by the FSA in 2010. New sales became impossible, so any further damage to the public was capped, but there was also a cost to those who had already bought.
I’m not much of a fan of these products. Paul definitely isn’t. And I’d be surprised anyone will be able to sell new product under any new regimen, and would therefore be highly suspicious of any firm that emerges and does so. We will need to see the fine details for that.
But, does any of that help people who may well have already bought plans in underfunded trusts? How would any deficits identified be handled by the regulator or government? And who is footing the bill? Again.
As for Paul’s haughty if rational analysis of why these plans are terrible, it would have been worth asking a few of the purchasers why they did so. Were you to do so, you will find the most bizarre array of wonky logic and fallacious rationales that it would be impossible to create a simple decision tree to lead people away from purchase by negating all their phobias, worries, tics and prejudices. Moreover, why would anyone lock up this cash rather than put it in a bank account? Perhaps, just perhaps you don’t trust yourself to leave it there? Or maybe you fear others, rogue care home workers or avaricious or strapped relatives will steal it? And the bank won’t be paying enough interest any time soon to keep up with inflation.
“Funerals are for the living not the dead.”
Really?
Just for some balance.
I think the issue is with the providers not the clients. So regulation has to be the way forward. Yes clients do ask for a funeral plan for lots of different reasons. Those with enough money want security of knowing its paid for and (most) of the detail is already sorted out. Those with less capital – have to consider if their savings breach the allowance for benefits (Council Tax relief – Pension Credit etc) and this is a legitimate expenditure on that basis. The government set the rules so why not?
I know Paul doesn’t like IFA’s but I’m confident my clients do and they trust us (me) to be honest and ethical with their finances and as Harry Katz’s says that includes our fee disclosure.
I too would like to see the evidence for any potential default of the Trust – where would I get such information?
I have rarely heard bereaved relatives complain about funeral directors Paul. One of our nation’s largest funeral directors is the ‘Co-op’ which must surely appeal to your anti-mercantile principles – yet presumably you don’t like their funeral directors either? Like IFAs, funeral directors are largely good sensitive people doing an honest job, yet apparently they earn no respect from you. I imagine most people have far more respect for funeral directors – and even IFAs – than for journalists! I agree with you entirely on the subject of funeral plans though.
The result of a Google search on the (average) cost of a burial funeral is £4,383 (burial) or £3,290 (cremation) ~ plus whatever sundry extras may be selected. Some results are higher. And those costs have for many years been rising at rates inxs of inflation.
So, if the cost of a prepaid plan is lower (by a decent margin) than the cost of a funeral today and includes a guarantee against future increases, I don’t see that as a poor deal. The opportunity to pay by instalments may well be attractive.
They’re not for everyone, of course, but many may well feel that their funeral is a good thing to arrange in advance.