The Treasury is proposing to bring the sector under the regulation of the Financial Conduct Authority after claims that elderly people are being “pressured, harassed and misled” by some funeral businesses.
Demand for funeral plans has grown rapidly, with annual sales rising by about 245% between 2006 and in 2017, but regulations have remained the same since 2001.
Currently, 95% of the market is voluntarily regulated by the Funeral Planning Authority but the FPA is not able to stop providers from trading and its code of practice is not legally binding, ministers say.
Fairer Finance managing director James Daley said: “People who buy funeral plans are not around to measure delivery against their expectations, which is why it’s so important there are clear rules around how companies must behave.
“With most plans costing over £3,000 – it’s important that customers can have total confidence that their money is safe.”
Economic secretary to the Treasury, John Glen, said: “It breaks my heart to think that our oldest and most vulnerable are being pressured into funeral plans that leave their grieving families out of pocket.
“There are thousands of pre-paid funeral plans bought each year and most providers are fair and legitimate.
“But tougher regulation will ensure robust standards are enforced for all plan providers and protect individuals and their families if things go wrong.”
Simon Cox, from funeral provider Dignity, which saw its shares fall sharply on news of the review, said: “Our research has shown that bad practices like persistent and pushy cold-calling are rife among firms that have no oversight from a regulatory body.
“Most consumers wrongly believe that their plan is regulated by the FCA, when in fact they aren’t.
“The majority are registered with the industry’s own voluntary regulator, but there are a growing number of new providers taking advantage of a regulation gap and not regulated at all.”
Mr Cox said the FPA regulation was “the right option” but the organisation would be a more effective regulator if it had “more teeth”.
“However, what is most important is that the regulation gap in the sector is filled,” he added.
Meanwhile, the Competition and Markets Authority (CMA) has launched its own investigation of the £2bn market to examine if information being given on prices and services is clear enough for people to choose the best option.
The regulator will also look at funeral prices and cremations, although it will not look at pre-paid plans.
The average funeral cost £3,800 last year, and extras can add another £2,000 to the bill.
Catherine Powell, co-founder and director of direct cremations specialist Pure Cremation, said: “The bereaved should be treated as vulnerable consumers and given much more help to make informed decisions…Many believe that funerals are priced as “distress purchases” and this review is a great opportunity to make recommendations that restore public confidence in the industry.