issues for insolvency practitioners in the UK

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The funeral plan provider would usually set up a trust with independent trustees in which the clients’ money should be held in order to cover the clients’ funeral expenses. Alternatively, the supplier can take out an insurance policy with the customer’s funds. In the case of Safe Hands Funeral Plans, the most prominent funeral plan provider to fail in recent times, the provider fell into administration with insufficient funds to cover funeral costs for all customers.

Sales of prepaid funeral packages have grown significantly in recent years. Members of the Funeral Planning Authority – a voluntary regulator of the largest funeral plan providers – have over 1.6 million undrawn funeral plans and over 200,000 new funeral plans sold to customers by its members in 2021.

Regulation of service providers and intermediaries

In January 2021, the UK government legislated to bring all providers and intermediaries of prepaid funeral plans under the FCA’s regulatory mandate from 29 July 2022. This means companies will need to be authorized by the FCA if they wish to provide or sell funeral plans from July 29, 2022. Failure to do so will be a criminal offence.

Various companies have applied for FCA clearance, and FCA has considered each application on a case-by-case basis. Some funeral plan providers have not applied for approval or have withdrawn their application, and these companies are expected to cease operations no later than July 29, 2022.

Financial Services Compensation Scheme and Other Legislation

The government has also announced that further legislative changes will be made to ensure that from July 2022 the FSCS can operate effectively for customers of prepaid funeral plan contracts in the event of an FCA-approved supplier default. The FSCS is the government’s compensation scheme for customers of licensed financial services firms. If an FCA approved firm is unable to pay amounts due to its customers, the FSCS may step in to compensate that customer.

In April 2022, the government published its response to a consultation on the changes it proposes to make how the FSCS will operate following the failure of an FCA approved funeral plan provider. These changes directly affect the role of an insolvency practitioner who is appointed administrator or liquidator of a funeral plan provider in several important ways.

Excluding insolvency practitioners from having to be regulated to carry out funeral plans

The government is proposing to amend the Financial Services and Markets Act (Regulated Activities) Order 2001 (RAO) so that if a regulated provider of funeral plans goes bankrupt and its business is temporarily taken over by an insolvency practitioner who is appointed administrator or liquidator of the regulated provider, such insolvency practitioner is exempt from the requirement to obtain FCA authorization to perform funeral plan contracts. This will allow an insolvency practitioner to temporarily exchange a funeral plan business in order to achieve an orderly liquidation of the provider’s business.

Most liquidations tend to result in an immediate shutdown of business operations. However, the situation is more complicated with funeral plan providers where clients unfortunately pass away shortly after liquidation and alternative funeral arrangements have not yet been made.

An obligation for insolvency practitioners to cooperate with the FSCS

The government will impose a legal obligation on insolvency practitioners to cooperate with the FSCS if the insolvency practitioner is appointed as administrator or liquidator of a regulated provider. The obligation will oblige the insolvency practitioner to cooperate with the FSCS following a request made to the insolvency practitioner by the FSCS to ensure continuity of cover or compensation for clients.

This obligation to cooperate will only apply to the extent that the insolvency practitioner has sufficient funding to cooperate and the FSCS may only request assistance that it has “identified as necessary”. This duty to cooperate will not override an insolvency practitioner’s existing legal obligations and liquidators will only be required to comply with the duty to cooperate if it is consistent with their duties under Schedule 4 of the Insolvency Act 1986.

The government will also empower the FCA to make rules allowing the FSCS to provide discretionary funding to the administrator or liquidator of a defaulting funeral plan provider, to cover costs that have been reasonably and exclusively incurred by such administrator or liquidator for the purposes of cooperating with the FSCS in connection with this new obligation. Such funding may be provided in the form of payments to the defaulting funeral plan provider or through direct payments to the administrator or liquidator. It is intended that one of the conditions for the financing of the FSCS is that the administrator or the liquidator does not otherwise have access to sufficient funds to cover the costs of the cooperation.

Ensure continuity of customer coverage

The government is keen to ensure that funeral plan contracts can be effectively transferred between providers when appropriate.

In this regard, it will empower the FCA to make rules requiring or permitting the FSCS to make arrangements to ensure continuity of cover for customers of failing funeral plan providers.

This power would allow the FSCS to take steps (including making payments) to ensure continuity of cover either by permitting the transfer of the existing funeral plan contract to another FCA approved provider or by obtaining a funeral plan from replacement with another supplier approved by the FCA.

The government also intends to allow funeral plans to be treated as if they had been transferred from an existing provider to a new provider for regulatory purposes if reasonable steps have been taken by the existing provider to obtain express consent. of the client to the proposed transfer, but that this consent could not be obtained within a reasonable time and the AMF was informed of this fact.

Enable the FSCS to more effectively seek recovery of relevant fiduciary assets and insurance funds for monies paid to compensate consumers or to ensure continuity of coverage

Currently, if an authorized business is unable to satisfy a consumer’s claims and the FSCS pays compensation to that consumer, the FSCS would normally take an assignment of the consumer’s rights against the business. This allows the FSCS to seek recovery directly from the company for the compensation that the FSCS has paid to consumers. However, the trust deeds and insurance policies underlying the funeral plan arrangements may not clearly or sufficiently state the consumer’s rights, or the consumer may have no rights whatsoever to those funds.

In order to ensure that the FCA can establish the necessary rules that will enable the FSCS to obtain recovery of the trust assets and insurance funds which underlie funeral plan contracts, the government intends to give the FSCS the power to vary existing terms in trust or insurance agreements. contracts underlying funeral plans, in circumstances where the assignment of consumer rights does not allow the FSCS to obtain recoveries from trusts or insurers.

Essentially, the FSCS would be able to modify trust indentures and insurance contracts in a way that would allow the FSCS to claim or receive the funds held under those trust indentures or insurance contracts.

These are global changes that are being implemented and it will be important for insolvency practitioners appointed by regulated providers to be aware of this and to strike the right balance between these regulatory obligations and their broader obligations to creditors of the insolvent provider.

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