Funeral Planning Authority News

Information Bulletin No.1

THE FINANCIAL SERVICES AND MARKETS ACT 2000

(REGULATED ACTIVITIES) ORDER 2001

TRUST BASED FUNERAL PLANS

TRUST DEED REQUIREMENTS

A bulletin to provide information about the provisions that need to be included in trust deeds to meet the requirements of the Regulated Activities Order, and other trust deed provisions to meet the requirements of the Rules of the Funeral Planning Authority This bulletin represents the view of the Funeral Planning Authority as at 1 March 2004 Further information about the Funeral Planning Authority can be obtained from the Chief Executive at:

Funeral Planning Authority Limited

Knellstone House,
Udimore,Rye,
East Sussex,
TN31 6AR
Telephone: 0845 601 9619

THE FINANCIAL SERVICES AND MARKETS ACT 2000 (REGULATED ACTIVITIES) ORDER 2001 (“RAO”)

This bulletin has been produced by the Funeral Planning Authority (“the Authority) as (1) an aid to those who are considering entering as a provider into funeral plan contracts after 1st January 2002, and taking advantage of the exclusion criteria for trusts in RAO article 60(1)(b); and (2) to provide information about the Rules of the Authority, in so far as they may relate to trust deeds. It should be noted that in some cases the Rules of the Authority may have compliance requirements that are in addition to those contained in the RAO.

It is the provider of funeral plan contracts who has the responsibility to decide whether or not they comply with the terms of the RAO, and in particular the exclusion criteria in articles 60(1)(a) or (b) of the RAO. Therefore, it is recommended that plan providers seek professional advice about how the RAO affects them, and whether they comply. The Financial Services Authority has said that it if you are uncertain about your position under the RAO, you can call their Authorisation Enquiries Team on 020 7066 5734/4698/4706/1208. Please ensure that if you provide funeral plan contracts you comply with the RAO, or apply to the Financial Services Authority for authorisation, as the penalties for not doing so are severe – a maximum of two years’ imprisonment and an unlimited fine.

Whilst it is believed the statements contained in this bulletin are correct, the Authority is unable to advise plan providers whether they comply with the exclusion criteria, and the Authority accepts no responsibility for any decision plan providers may make.

This bulletin relates solely to trust funds taking advantage of the exclusion criteria in RAO article 60(1)(b). If a provider of funeral plan contracts wishes to take advantage of the exclusion criteria in RAO article 60(1)(a), it is recommended they seek professional advice. The Rules of the Authority provide that the Authority may establish a scheme to enable persons providing funeral plans in accordance with RAO article 60(1)(a) to become a registered provider . If your arrangements fall within article 60(1)(a), and require further information, please contact the Chief Executive of the Authority

1.

What is the effect of the RAO?

1.1
By RAO article 59(1), entering as provider into a funeral plan contract will as from 1st January 2002 be a specified kind of activity for the purposes of the Financial Services & Markets Act 2000. “Funeral plan contract” is defined in RAO Article 59(2).
1.2
Copies of RAO articles 59 & 60 are available from the Chief Executive of the Authority or the Stationery Office website www.legislation.hmso.gov.uk
2.

Exclusion criteria
2.1
There is excluded from RAO article 59 any contract under which:-
2.1.1
the provider undertakes to secure that sums paid by the customer under the contract will be applied towards a contract of whole life insurance on the life of the customer for the purpose of providing the funeral. The insurance contract has to be effected and carried out by an authorised person (RAO article 60(1)(a)); or
2.1.2
the provider undertakes to secure that sums paid by the customer under the contract will be held on trust for the purpose of providing the funeral, and that the requirements with respect to the trust are or will be met (RAO article 60(1)(b)).
2.2
If a provider of funeral plan contracts decides to continue in business after 1st January 2002, but not meet either of the exclusion criteria, it will have to apply to the Financial Services Authority for authorisation.
2.3
The following paragraphs relate solely to those providers of funeral plan contracts who elect to meet the criteria for trust based funeral plan contracts in RAO article 60(1)(b).
3.

Trust Deed provisions
3.1
For the purposes of RAO article 60(1)(b), the following requirements must be met in relation to the trust. It is recommended that, where appropriate, the requirements should be recorded within the trust deed with an obligation on either the plan provider or the trustees to ensure compliance;
3.1.1
The trust must be established by a written instrument;
3.1.2
More than half of the trustees must be unconnected with the provider;
3.1.3
The trustees must appoint an independent fund manager who is an authorised person who has permission to carry on an activity of the kind specified by RAO article 37, and who is a person who is unconnected with the provider to manage the assets of the trust;
3.1.4
Annual accounts must be prepared, and audited by a person who is eligible for appointment as a company auditor under section 25 of the Companies Act 1989, with respect to the assets and liabilities of the trust;
3.1.5
The assets and liabilities of the trust must, at least every 3 years, be determined, calculated and verified by an actuary who is a Fellow of the Institute of Actuaries or of the Faculty of Actuaries – please also refer to paragraph 3.7.8 below;
3.2.1
Whether or not a person is “unconnected with” the plan provider can be determined from the definition in RAO article 60(2). Also, RAO article 60(2)(e) refers to “close relative”, which is defined in RAO article 3.
3.2.2
Whilst general trust law principles will apply in the drafting of the trust deed, the provisions in paragraph 3.7 below, many of which are peculiar to funeral plan contract arrangements, may be considered for inclusion in the trust deed established by written instrument.
3.2.3
The Authority’s application requirements to become a Registered Provider provide that the trust deed must state specifically (a) the purpose for which the trust fund has been created; (b) that its assets are being held on behalf of customers who have paid or are paying in advance for their funeral; (c) that they are not the assets of the plan provider; (d) in the event of the insolvency of either the plan provider or the trust fund, any liquidator/administrator or other person who may be appointed as a consequence of the insolvency has no claim against the trust fund, or its assets for purposes other than the delivery of the customers’ funeral.
3.3
The Institute of Actuaries and the Faculty of Actuaries has produced Guidance Note 38 for use by members of their Institute in relation to the preparation of actuarial valuations pursuant to RAO article 60 (1) (b) (v). It is recommended that you consult the actuary to your trust fund, who will be able to advise on the affect (if any) that the provisions of the Guidance Note will have on your trust fund.
3.4
An acknowledgement within the trust deed that the plan provider/settlor will apply for registration with the Authority, and agrees to the trustees releasing to the Authority any documents that may required to be presented to it in connection with the plan provider/settlor’s application for registration and subsequent applications for reregistration.
3.5
Plan providers intending to comply with the exclusion criteria of the RAO may wish to take professional advice on any taxation implications of the structure of any funeral plan trust that may be created. A letter dated 12 July 2001 from the Chief Executive of the Authority to known or believed plan providers addresses a particular inheritance tax issue. A meeting took place with the Inland Revenue, and whilst the position relating to interest in possession trusts remains unchanged, it is possible the Revenue may be able to agree some simplification in the administrative reporting procedure for discretionary trusts.. If you did not receive a copy of the 12 July 2001 letter, please contact the Chief Executive who will be pleased to supply a copy.
3.6
Those items marked * in paragraph 3.7 will require to be included in the trust deed, in order to comply with the Rules of the Authority.
3.7
All of the requirements mentioned in paragraph 3.1 must be reflected in the trust deed to meet the requirements of the RAO. Some of the following provisions may be peculiar to funeral plan contract arrangements because of the duty on trustees to preserve the trust fund for payment of the contracted funeral, and should be considered for inclusion in the trust deed.
3.7.1.
Who are to be the beneficiaries of the trust? The plan provider, the funeral director(s) or the customer?
3.7.2
Power for the plan provider as settlor of the trust to appoint and remove trustees,
3.7.3
Should there be individuals as trustees or is it appropriate to have a corporate trustee – i.e. the trustee division of a bank?
3.7.4
If individuals are appointed as trustees – are they fit and proper persons for appointment? Please see the Authority’s Information Bulletin No 2 - Guidance on Fitness and Propriety.
3.7.5
The trustees to act by unanimity.
3.7.6
Investments forming part of the trust funds to be held in the names of the trustees, or to the order or account of the trustees i.e. in the name of a custodian or custodian trustee;
3.7.7
Provision for preparation of annual audited accounts as per RAO article 60 (1) (b) (iv), with the trustees being authorised to produce them to the settlor, their bankers, the actuary to the trust and to the Authority in connection with its monitoring and compliance responsibilities.
3.7.8
By way of addition to the terms of the exclusion criteria in the RAO, the Rules of the Authority will provide for the actuary to carry out an annual review and valuation of the trust fund (rather than once every 3 years as required by the RAO), but with the Compliance Committee of the Authority having discretion to require actuarial valuations at other intervals not exceeding 3 years. Therefore, the drafting of this provision should provide for flexibility.
3.7.9
If an actuarial valuation shows a surplus, can this be distributed by the trustees to the plan provider/settlor or must it remain within the trust fund?
3.7.10
Appropriate arrangements exist to make good any shortfall or deficiency in the trust fund as shown by an actuarial valuation or otherwise, and to ensure the arrangements are sufficient to discharge the plan provider’s obligations.
3.7.11
Trustees to provide the fund manager, at least annually, with a written brief setting out the investment aims and objectives of the fund and the time scale over which the fund managers are required to perform.
3.7.12
Cash and other assets comprising the trust fund to be invested prudently with a view to minimising the risk that the assets will be insufficient to meet the liabilities of the trust fund.
3.7.13
The terms of the trust to prohibit the trust fund assets from being invested in matters in which any connected person has a material interest, including, but not limited to investing in or providing loans to the plan provider or associated businesses.
3.7.14
The terms of the trust to permit withdrawal from the trust funds, after production of appropriate evidence of entitlement, to payments to meet taxes, professional fees and other expenses authorised under the trust deed and permitted under the terms of the contract between the plan provider and its customer.
3.7.15
Permission, after production of appropriate evidence, to make the following payments: (i) To the plan provider or the funeral director in respect of funerals performed for customers; (ii) To the plan provider in respect of refunds on cancellation of a funeral plan contract
3.7.16
The trust to be authorised to pay the insurance premium on a policy(s) for the benefit of the trust against loss suffered because of the breach of duty or dishonesty of the trustees. The trust deed to be in terms which ensure that any monies paid under such a policy cannot be paid over by the insurer other than to pay for customer’s funerals, to make a refund to customer’s of the money they have paid under their funeral plan contract, or to meet administration expenses as permitted under the terms of the trust deed.
3.7.17
Maintenance of books of account and records appropriate for the supply of information in connection with the audit, and work to be undertaken by the actuary, as required by RAO articles 60(1)(b)(iv) and (v) respectively. It is desirable to agree the form of the information with your advisers as soon as possible.
4.

Pledge to Customers

4.1
The Authority has introduced a Pledge to Customers for the benefit of customers of funeral plan providers registered with the Authority. The terms of the Pledge are as follows: “Registered Providers shall co-operate in the delivery of the Authority’s ‘Pledge to Customers’ by which, in the event of the insolvency of a Registered Provider, the other Registered Providers will examine ways in which the Authority might assist in arranging delivery of the funerals of customers of the insolvent Registered Provider. The extent of this co-operation will be at the discretion of the individual Registered Providers.

Funeral Planning Authority Limited – March 2004

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