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Funeral plan holders not covered by UK compensation scheme

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Written by: Paloma Kubiak
30/08/2017
The Financial Services Compensation Scheme (FSCS) has confirmed it doesn’t provide protection for individuals who have paid into a funeral plan where the provider subsequently goes bust.

The FSCS has clarified its position on funeral plans, stating that even if the product was bought by consumers paying a lump sum or in monthly instalments, it won’t pay out to individuals if the provider fails.

Prepaid plans which allow people to plan and pay for a funeral in advance, have become a more popular means to deal with the rising cost of funerals.

According to the Funeral Planning Authority (FPA), there are more than 20 funeral plan providers and more than 210,000 plans were sold in 2016, up from the 183,000 sold in 2015 and 147,000 bought in 2014. It is estimated there are more than a million plans currently in place. See YourMoney.com’s Prepaid funerals: what you need to consider for more information.

However, many people incorrectly believe that funeral plans come under the scope of the FSCS as they consider them to be insurance products.

The FSCS explained that while funeral plan providers can be regulated by the Financial Conduct Authority (FCA), the vast majority choose to use exemptions available to them which means they are not.

Even if a regulated funeral plan provider were to sell a funeral plan to an individual, this wouldn’t be covered by the FSCS because these products are not categorised as a ‘designated investment’ under FSCS’s compensation rules.

How are funeral plan buyers protected?

FPA registered providers don’t hold the money paid into a plan. Instead it’s used to buy a whole of life insurance policy on the life of the plan holder, or the money goes into a trust. The FPA explained the separation is to ensure that if anything were to go wrong with the provider, the assets to pay for the funeral would be separated and ring-fenced. All providers in the market should by law be using a similar mechanism of separating the assets, the FPA added.

Graeme MacAusland, CEO of the FPA, said: “Consumers who have a plan with a FPA registered provider have added protection as we put in place important safeguards to ensure customers get the funerals that they have paid for. Customers also have the additional levels of protection and rigour provided by our compliance checks when purchasing their plan from a registered provider. These checks are designed to ensure providers comply with our rules and code of practice.”

The FSCS further stated: “In some limited circumstances where the provider of a whole of life insurance policy or provider of a product held within a trust goes bust, FSCS may be able to pay compensation to the provider of the funeral plan or the trustees. It would then be for the funeral plan provider or the trustees of the investment fund to decide what to do with any monies that are paid out as a result.

“Having paid compensation, FSCS is not responsible for the decisions that funeral plan providers or investment fund trustees may make. It is unlikely that FSCS would be able to pay compensation directly to individuals.”

‘Educating customers on anomalies in consumer protection’

James Daley, managing director at Fairer Finance, said: “We’re delighted to see FSCS bringing some clarity to where its coverage lies and doesn’t lie around funeral plans.

“The fact remains that 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.

“It’s commendable that bodies like FSCS are educating customers on any anomalies in consumer protection.”

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  • Stephen Pett

    Oh dear – some confusing misinformation here!

    Firstly, with the exception of the Co-op, an FPA member, no correctly set up funeral plan provider (and all significant ones will be) would disadvantage its clients if it went under for the simple reason that the provider and funds are kept to entirely seperate.

    This means that your funds would not be affected and the fundholder would arrange for someone to organise funeral just the same. Only the Co-op would actually (according to their T&Cs) send your money back less the costs of returning it, which we do not consider satisfactory – if you have died, you need the money for a funeral. We have complained to the FPA and are awaiting their response.

    Funds are held either by a separate regulated insurance company or in a separate independent trust fund which is normally audited every year and reviewed to make sure it is on track by a specialist actuary every 3 years.

    Funeral plans arre more complicated than they look, and independent advice is essential – sadly, most plans are sold by people tied to just one company.

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