Response to call for evidence on Regulation of Pre Paid Funeral Plans
From Derek Forbes trading as Forbes Management
- Overall opinion and views by Forbes Management
- Appendix – answers to consultation questions 1-18
- Background and involvement with statutory and voluntary regulation of legal and financial products and services stretches back over several decades.
The views expressed in this response are the views of Derek Forbes (trading as Forbes Management) alone and do not represent the views of, although may well coincide with, any other individual, firm or organisation. No other individual, firm or organisation has been consulted prior to the submission of this response.
The PPFP sector is in need of regulation, but great care must be taken not to repeat the disruption caused by the FSA (as was) in the late 1980’s when a regulatory regime was created that wiped out the direct selling sector of the life insurance industry by imposing unacceptable administrative burdens on the customer facing sales process. Lengthy fact finds, “reasons why” letters and commission disclosure made the sales process too burdensome for simple domestic sales and almost all life companies disbanded their sales forces. Estimates are that some 40-50,000 hard-working and honest men and women lost their jobs. All to counter the dishonest activities of a few high profile intermediaries who were too clever to be caught anyway and simply went on to engage in other market sectors where they could operate with impunity.
The result is that, today, in the domestic market, hardly anyone buys life insurance, savings plans or individual personal pensions. The government has recently cut bereavement payments to widows with young children. A simple term insurance sold to a young husband would have cost very little for a substantial sum assured. Sadly there is no one left to sell such policies. The saying applies: “Insurance is sold, not bought”.
Retirees who are not in an occupational pension scheme have very little put away for old age and most C1 and lower category individuals rely largely on the OAP for retirement income. This situation and trends will only worsen as the population ages. Financial advisers concentrate almost exclusively on high net worth individuals and corporates. The average age of IFA’s is estimated at around 50+ as very few young people see financial advice (previously known as insurance sales) as a career path.
Had the regulation been directed at the product providers (the life offices), who were obsessed with premium income and manpower at the expense of virtually everything else, this current scenario could have been avoided. Sadly the life offices did not want to erect any barriers to maximum business and turned a blind eye to malpractice and courted big and sometimes disreputable business producers with “golden hellos”. They refused to monitor the activities of their own salespeople – let alone the independents and tied agencies. Initially “compliance officers” were appointed by the life offices, but were largely ineffective due to the continuous courtship of high producing sales people. In a number of cases the compliance officers were too scared to report on the misdemeanours of the high producers and were told to “lay off”. So the many (both the sales people and the public at large) suffered because of the misdemeanours of the few and the lack of concern by the providers.
Similar situations must not be allowed to arise in the PPFP market, as this kind of over-regulation would similarly kill off the market.
Future regulation of PPFP’s, therefore, should concentrate on the plan providers and not on the client facing sales process. It must be remembered that PPFP sales are hardly ever the main business activity of those who sell them. They are secondary to funeral directors – obviously – as their main function is carrying out funerals. Other advisers, largely will writers and IFA’s, do not see PPFP’s as their main function and are nearly always an ancillary service to existing clients. Excessive administrative burdens such as individual registration, authorisation, extensive paperwork and commission disclosure will simply remove the incentive to sell the products.
Whilst generous commissions may be seen as an incentive to carry on under strict statutory regulation, the plan providers would be disincentivised by excessive compliance burdens such as the supervision of direct (statutory) regulation of customer-facing individual salespeople and firms.
Previous Treasury initiatives to regulate the PPFP sector were more effective. In 1999 consultation took place leading to the inclusion of PPFP’s in the Financial Services and Markets Act 2000. This established the two main vehicles for funding PPFP’s – (Regulated Activities Order 2001) I.E. Trust based plans and Life Insurance based plans.
Incidentally I was involved, representing the Society of Will Writers, with the Treasury consultation to regulate will writing in the early 2000’s– this was not pursued. It was a blatant attempt at protectionism by the Law Society. It is interesting to speculate as to from whence comes the impetus for the current PPFP consultation. A diverse market in terms of provision should be encouraged and not be allowed to rest in the control of a few very large providers.
Future regulation should be created to concentrate upon customer protection from the product providers. The providers should be responsible for the activities of those who sell their plans, rather than direct statutory regulation of individuals and firms.
Protection for the customer should be provided in the two main categories of PPFP’s as follows:
Trust based plans.
- There should be maximum transparency surrounding the trust and its workings.
- An annual trust report should be issued and available to all customers.
- The annual report should include a breakdown of trust investments and a description of investment strategy.
- A comment on the basis of actuarial valuation of assets to liabilities. For example whilst Government Securities may represent a very safe investment, fluctuating interest rates can have an effect on capital values.
- Disclosure of amounts drawn from the trust for marketing initiatives and other activities.
- Declaration of any trust fund surpluses and details of how the surplus is distributed – ratio of retention in the trust and distribution to directors and others.
- Full disclosure of how the trust attempts to combat inflation. (Recently one major provider uplifted its payments to funeral directors by 1% to cover two years annual inflation).
- Breakdown of guaranteed elements of the plan and disbursements, together with administrative costs within each plan.
Life insurance based plans.
- Disclosure of the amount of client money allocated to the insurance policy.
- Disclosure of any financial relationship between the provider and the life company.
- How the life policy combats inflation.
Providers should ensure that intermediaries adhere to a recognised code of conduct. No cold calling, no misleading, no pressure selling etc. The Funeral Planning Authority (FPA) will doubtless create a workable model for this.
Thought to be given as to the differences between providers who are funeral directors and providers who are not.
The former can easily instruct their own employed staff to carry out the funerals, and can even conduct funerals arising from funeral plans below cost as “loss leaders” in order to increase market share, but they have no such control over funeral directors who they may appoint in areas where they do not have one of their own FD’s.
For providers who are not FD’s, thought should be given as to the details of the contracts between the provider and the FD and any other financial interest that may exist between the two. Should incentives to sell certain products by differential commission rates depending upon the product sold or enhanced commission or other incentives be offered depending upon the volume of sales submitted by the intermediary? The role of the FPA in all the above will be crucial. Will the FPA have statutory powers to discipline providers who fall short of the codes of behaviour set out by the FPA?
A transparent complaints procedure should be in place. Should all providers be bound to report all complaints to the FPA or should the FPA make regular check on such issues? The role of the CQC in the monitoring of GP practices whilst very much more complex and multi-layered than potential regulation of PPFP’s is a good model for a regulatory regime.
The FPA could be required to insist that providers monitor the fitness of secondary agents – individuals or firms. This could be achieved by ensuring that such sales outlets adhere to a strict code of conduct. This could be addressed by ensuring that such parties belong to recognise statutory body I.E. Solicitors Regulatory Authority (SRA) or direct authorisation by the FCA (IFA’s), CII and others such as ILEX, ICA etc.
Voluntary regulators should be included provided that they monitor their members to ensure the members adhere to an acceptable code of conduct to include carrying PI insurance and commit to Continuous Professional Development (CPD). Such bodies would include The Society of Will Writers (SWW) the Institute of Professional Will Writers (IPW) and others.
Consideration should be given to empower the FPA to monitor the terms and conditions issued by providers. Particularly the readability and ease of understanding. Many contracts for PPFP and other goods and services in the marketplace generally have T&C’s that are hard to read and are largely very legalistic, designed to provide a “get out” in cases of dispute. Bearing in mind that many PPFP customers are elderly, maybe with poor eyesight, to make a contract dependent upon the customer having “read and understood” the T&C’s, as many providers do, is unfair. In other market sectors this problem is even worse – consumer credit agreements, car leases etc. are all virtually impossible to understand without legal expertise. In addition, most people just tick “accept” when signing up for services on line. The recent Plain English Campaign www.plainenglish.co.uk should be adopted by those regulating the PPFP sector.
Finally, some products are marketed as “Funeral Plans” but are actually term insurance policies on the life of the customer. In other words just a way of providing a sum of money upon death. Some of these policies are issued with very restrictive conditions, such as cancellation of the policy if one monthly premium is missed.
Is it the intention or within the remit of the consultation to address the way these policies are marketed and a more specific description of their nature be insisted upon?
Answers to consultation questions 1-18
Question 1: Are there any other common ways to structure funeral plans, not outlined in this call for evidence?
Answer 1.Not to my knowledge – but some older FD firms still take customer money and “keep it” to fund future funerals without using the approved trust or life assurance channels. The FPA will investigate any such instances that are brought to their attention.
Question 2: Are funeral plan providers always the policyholder of underlying insurance policies? Are you aware of any examples of insurance intermediation within the funeral plan sector?
Answer 2. As far as I know the provider holds the policy on the life of the client as “life of another”. Some IFA’s sell plans. Also as mentioned above: The relationship between provider and life company should be transparent.
Question 3: Where providers engage with third parties (e.g. funeral directors, charities, external companies), in what capacity do these third parties act and what is their relationship to the funeral plan provider? How are market participants remunerated and do any conflicts of interest arise?
Answer 3. As agents (retailers) of the plan providers’ products. Some FD’s are owned by the provider. Remuneration is usually by commission on plans sold. The FPA limits the percentage of the plan price that can be used to fund all acquisition costs. Non FPA members do not need to follow these guidelines
Question 4: Are there any additional issues you think the government should be aware of in relation to the way in which funeral plan products are structured or sold?
Answer 4. My views are outlined in the main text of my submission
Question 5: How, and through what channels, do funeral plan providers communicate with consumers for the purposes of distributing information, promoting and selling funeral plans?
Answer 5. Differs provider to provider – some communicate fully, some are opaque. Should the ASA be tasked to ensure “honest –truthful etc”. Some advertising copy is clearly designed to avoid important detailed features of the product. E.G. Not a clear explanation of the difference between guaranteed services and disbursements.
Question 6: What are your views on the scale and nature of consumer detriment at the point of sale? Please provide evidence where possible.
Answer 6. Hard to determine. Recent TV documentary exposed overselling. Also see comments in my submission above regarding Terms & Conditions. It should be borne in mind at all times that many PPFP customers are possibly elderly and vulnerable.
Question 7: To what extent is cold calling present within the funeral plan sector and does this present an additional or specific risk to consumers?
Answer 7. There are still outbound call centres. GDPR may improve this, but many are based on ”life style surveys” and client has no recollection of requesting information – probably just filled in survey to enter a competition.
Question 8: How much on average do consumers pay for funeral plans and in what circumstances would consumers pay money directly to funeral providers?
Answer 8. Varies considerably – hopefully based on national averages of “at need” costs. Most plans require money paid direct to provider or associated account. Most providers offer both monthly and single payment options. Monthly plans not to be confused with monthly life assurance term assurance plans advertised as “funeral policies or plans”.
Question: 9: What protections are currently in place for consumers (for example, complaints procedures) and how effective are these protections? How can complaints and claims be brought against funeral plan providers after the death of the customer?
Answer 9. FPA is in a better position to answer – depends on FPA membership and specific procedures. Providers should have complaints procedures. Some providers choose not to be subject to FPA membership and regulation
Question: 10: What protections are currently in place for consumers if a funeral plan provider were to have insufficient money to pay claims, and what is your view of their effectiveness?
Answer 10. Membership of FPA has a degree of protection – maybe should be greater – small issues could be absorbed. Large failures would be problematic.
Question 11: What is your experience of the scale and nature of consumer detriment (if any) that arises once a funeral plan has been entered into? Does this vary for different types of plans?
Answer 11. It does differ – is a funeral director appointed at outset and jointly guarantees with the provider to carry out his services at no extra cost however far into the future the funeral is required?, or does the provider have to search for a provider at time of need? This is particularly important if there is a shortfall in assets to liabilities. Probably does not arise for insurance based plans – only trust based plans – especially if the trust is not fully transparent. The client must not be misled into thinking that a specific funeral director has agreed to the plan when only a preference has been recorded.
Question 12: What are your views on the proposal to bring the sector within the scope of the FOS and/or the FSCS? What are most common types of complaints against funeral providers?
Answer 12. Presumably these remedies are only available to FCA regulated entities, so not advisable for reasons given elsewhere in this response. Unclear about level and types of complaints – providers do not generally publish these, but FPA should have powers to demand records of all complaints. (Rather like CQC does with GP practices).
Question 13: What types of investment strategies are being adopted by trustees who are managing trusts on behalf of funeral plan providers and what is your view on the effectiveness of these strategies in securing the short and long-term interests of plan-holders? Are trust returns withdrawn by providers for revenue raising/profit purposes and, if so, what proportion of these returns are withdrawn in this way?
Answer 13. This is fundamental to the issue of trust fund transparency. Some kind or overall monitoring should be in place – possibly by the FPA. Full reporting of acquisition margins are desirable. Are trust surpluses distributed to directors of the provider company and/or others? How is it decided what should be retained in the trust if a surplus arises?
Question 14: What are your views on the government’s proposal for FCA regulation of all funeral plan contracts and whether such a proposal will meet the government’s stated objectives (as set out above)? Do you consider that an alternative proposal could better meet these objectives?
Answer 14. FCA regulation would probably impose excessive regulation on sales intermediaries – most would decide not to be involved, thus leading to collapse of the sector. My views set out more fully in my responses above – strengthening role of FPA in particular.
Question 15: How should the regulatory framework apply in relation to funeral plans that consumers have already entered into?
Answer 15. Probably impossible to create an effective structure. Only at need would any problem become apparent. Problems pre-need would be covered by complaints procedures.
Question 16: Should regulation extend beyond funeral plan providers, and apply to intermediaries engaged within the sector? Should such intermediaries become regulated entities, or should they be overseen by funeral plan providers as appointed representatives?
Answer 16. The latter – detailed reasons in my submission above. THIS IS PROBABLY THE MOST IMPORTANT MATTER UNDER CONSIDERATION.
Question 17: What would be the overall impact on the market/your firm if all funeral plan contracts were subject to FCA regulation? Are there specific activities or businesses, such as SMEs, within the sector that would be particularly affected by strengthened regulation? What is your view of the potential costs and benefits of the government’s proposal?
Answer 17. As stated this would be a disaster – my reasons in my submission above.
Question 18: How long would the sector need to adapt to any new regulatory framework the government may seek to put in place?
Answer 18. Quite quickly – a few months for retraining and reprinting and distribution of amended literature. Firms who are not currently members of and regulated by the FPA would take longer as FPA would have to conduct fitness procedures etc.
DEREK FORBES July 2018.
Educated at The City of London School, Derek spent his early years training as a lawyer at The Law Society School of Law and then developed a career in financial services. He studied CII examinations at the Holborn College of Law, Language and Commerce. He was Abbey Life’s advertising and marketing manager in its early days and then became a top sales producer, qualifying for the international Million Dollar Round Table.
Moving into management he became the top branch manager with Crown Life and then National Sales Manager for the direct sales forces of both Sun Alliance and Sun Life.
During this time he was a founder member of the Life Insurance Association and became a main board director of the LIA. When the LIA merged to become the Personal Finance Society, Derek was invited to become an Honorary Life Member of the Personal Finance Authority. After the introduction of statutory regulation, the direct sales sector of the life insurance industry virtually disappeared, so Derek pursued a career as a legal and financial marketing consultant. He became a Law Society approved training provider and senior management trainer at the Institute of Sales and Marketing Management, where he was awarded the Companionship of the Institute.
Seeing the potential of will writing he joined, and was invited to become the Honorary Chancellor of The Society of Will Writers and a member of their Executive Council, arranging and chairing their first ten annual conferences.
For twenty years he has been a business partner of Funeral Planning Services Ltd, designing and distributing funeral plans specifically for the legal and financial professions.
When Funeral Planning Services was taken over by The Ecclesiastical Insurance Company in January 2017, Forbes Management decided to use Funeral Partners Limited as the provider of the Legal & Financial Funeral Plans.
Derek’s knowledge of sales, marketing and management and the effects of regulation is extensive and his funeral planning design and distribution business model is based upon an extensive understanding of the problems and opportunities in the Will Writing and the legal and financial services marketplace.
He has written countless articles and books and has lectured extensively both in the UK and overseas. Mentioned in Debrett’s People of Today, Derek is a Liveryman and a Freeman of the City of London. He has served as a trustee of a number of local charities and has been chairman of his local council.