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Dear CEO | Release Date: 20th September 2023

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) has released its first Sector Priority letter for the Funeral Plans sector, outlining its regulatory focus from 2023 to 2025. This sector, now under the oversight of the FCA’s Insurance Market Division, plays a crucial role in providing essential services to millions. The letter details the FCA’s priorities, the identified risks of harm, and the expectations for firms operating within this sector.

Overview and Context

The UK insurance market, including Funeral Plan Providers, is instrumental for both consumers and businesses, offering vital financial protection services. Recently, this sector has faced numerous challenges including the economic impacts of COVID-19, increased inflation rates, and rising cost-of-living pressures. These issues are compounded by emerging risks like climate change and technological advances, which the FCA is monitoring closely to understand their potential impacts on the market.

FCA’s Strategic Objectives

The primary aim under the Financial Services and Markets Act (FSMA) is ensuring that financial markets, including the insurance sector, function effectively. For the Funeral Plans sector, this means supporting consumers to achieve their long-term financial goals and providing reliable services in times of need.

Financial Resilience

Firms are required to maintain adequate financial resources and closely monitor their prudential risks. The FCA’s 2023/24 Business Plan emphasises reducing harm from firm failures, particularly important in a sector where consumer trust is paramount. Firms must ensure they have sufficient capital and liquidity to meet their obligations and provide services as expected by consumers.

Solvency Assessments

The FCA has raised concerns about the quality of Solvency Assessment Reports (SARs) submitted by firms. These reports often lack the necessary detail for the FCA to validate the assumptions used in assessing firms’ solvency levels and risks. Improvements in this area are critical, and the FCA expects firms to enhance the clarity and comprehensiveness of their reporting.

Key Risks and Regulatory Focus for 2023-2025

Ensuring Consumer Protection

With the implementation of the Consumer Duty, the FCA expects firms to prioritise delivering fair price and value. This involves a comprehensive review of both open and closed product books to ensure they meet the new standards without adversely impacting consumers. Firms must also provide clear, understandable information and robust consumer support throughout the service lifecycle.

Governance and Corporate Conduct

Effective governance and strong corporate conduct are essential for ensuring positive consumer outcomes. The FCA has noted areas needing improvement, including the adequacy of disclosures during sales processes and the accuracy of financial promotions. Firms must strengthen their control frameworks to align with FCA expectations.

Operational Resilience

Operational resilience remains a critical concern, especially regarding firms’ capacity to handle system outages or disruptions, which are significantly detrimental to consumer trust and market stability. The FCA expects firms to have solid contingency plans and recovery strategies to mitigate these risks.

Actions and Expectations

The FCA will monitor firms’ compliance through data analysis, regulatory returns, and direct engagements. Firms are expected to proactively manage their financial health, consumer relations, and operational integrity to align with FCA standards. Non-compliance or failure to effectively address the outlined issues may lead to stringent regulatory actions.

Support for Consumers in Financial Difficulty

Acknowledging the economic pressures on consumers, the FCA expects firms to show flexibility and support, particularly in managing payments and avoiding disproportionate fees. This support is crucial in maintaining consumer trust and market integrity.

Conclusion and Next Steps

Firms in the Funeral Plans sector must rigorously assess and adjust their operations to meet the detailed expectations set out by the FCA. This includes enhancing financial resilience, consumer protection practices, and operational readiness. The FCA will continue to use its supervisory and enforcement powers to ensure compliance and address any deviations from expected standards. Firms are urged to engage actively with the FCA, participate in upcoming roundtables, and take all necessary actions to align with regulatory requirements, thereby ensuring they contribute positively to the sector’s sustainability and consumer trust.

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