Many funeral parlours operate outside regulatory frameworks, offering what resembles funeral insurance without licences or insurer backing. Here’s what they must do to stay on the right side of the law – and protect clients from financial harm.
An alarming number of funeral parlours across South Africa are offering what appear to be funeral insurance policies – without the proper licensing, oversight or insurer backing. Recent enforcement actions by the Financial Sector Conduct Authority (FSCA) have exposed a growing trend in which these businesses operate outside the bounds of regulatory compliance, often unknowingly. Many collect premiums from the public and promise funeral benefits, yet they do so without a financial services provider (FSP) licence or the agreement of a licensed insurer to underwrite their policies.
The consequences of this are far-reaching: not only are these practices unlawful, but they also leave policyholders vulnerable, with no legal guarantee that claims will be honoured. Proper placement of policies with a licensed insurer ensures that, in the event of a death, it is the insurer – not the funeral parlour – that assumes financial responsibility for paying claims. Without such an arrangement, families may face both emotional loss and unexpected financial hardship.
Understanding the root causes of non-compliance
Many funeral parlours engaged in these practices do not view themselves as part of the financial services sector. In their eyes, they are offering a prepaid funeral service – a straightforward transaction where a client pays in advance for a future burial. This perception leads them to believe that they are not providing a financial product and therefore are not subject to the regulatory framework that governs the financial services industry.
However, the reality is quite different. The moment a funeral parlour collects premiums in exchange for a promised benefit that becomes payable upon death – whether that benefit is a funeral service or a monetary payout – it enters the realm of insurance. Such arrangements fall under the definitions set out in the Insurance Acts and the Financial Advisory and Intermediary Services (FAIS) Act. As a result, the funeral parlour is required to either be licensed as an FSP or be a Representative of one, and the policies must be underwritten by a licensed insurer.
Some businesses may be genuinely unaware of these requirements, especially where informal practices have become entrenched over many years. Others may deliberately avoid compliance, viewing the process of licensing, legal agreements and reporting as too complex, costly or bureaucratic. This has created a regulatory blind spot in the industry – one that the FSCA is now actively working to close.
Regulatory and legal implications
The practice of offering funeral insurance policies without proper licensing or underwriting is a violation of several key regulatory frameworks designed to protect consumers and ensure the financial stability of the industry. At the core of these regulations is the FAIS Act, which governs the provision of financial services in South Africa. It stipulates that no person may act as an FSP unless they are licensed by the FSCA.
Additionally, the Insurance Act requires that insurance policies, including funeral cover, be underwritten by a licensed insurer to ensure the legitimacy of claims and the financial protection of policyholders.
Without these safeguards, both funeral parlours and their clients are exposed to significant risks. Funeral parlours operating without proper licences face potential legal action, penalties and the loss of their ability to operate within the financial services sector. Similarly, consumers are left vulnerable, as there is no legal recourse if a claim is denied or if funds are not available to cover the promised funeral benefits.
Recent FSCA enforcement actions
The FSCA has recently ramped up its enforcement actions in response to this growing problem. Several funeral parlours have been subjected to regulatory action by the FSCA, including debarments, financial sanctions and enforceable undertakings. These measures reflect the seriousness of non-compliance and the FSCA’s commitment to holding accountable those who operate outside the regulatory framework.
In addition to punitive measures, the FSCA has initiated a public awareness campaign aimed at educating both businesses and consumers about the importance of licensed insurance products.
Risks to consumers
For consumers, the most significant risk lies in the potential of not having a claim honoured when a death occurs. Without an insurer backing the policy, families may be left to shoulder the financial burden of funeral expenses without the promised support. This risk is especially pronounced in the low to middle-income market, where many families rely on funeral policies as a form of financial security and peace of mind. In these communities, the cost of a funeral can represent a major expense – often requiring families to borrow money or make difficult financial sacrifices at short notice. When a policy fails due to regulatory non-compliance or the absence of an underwriter, the impact can be devastating, both financially and emotionally.
Steps funeral parlours must take to comply
To avoid the risks associated with unlicensed operations and to ensure the sustainability of their businesses, funeral parlours must take immediate action to comply with regulatory requirements. Below are the key steps that should be taken to ensure full compliance with the FAIS and Insurance Acts:
1. Obtain an FSP licence or become a Representative of an authorised FSP
Funeral parlours must either apply for an FSP licence through the FSCA or become an authorised Representative under an existing licensed FSP. Obtaining a licence is the first step in legally offering insurance products and requires the submission of detailed documentation, including information about the business’s operations, Key Individuals and compliance frameworks. For smaller businesses or those new to the regulated environment, becoming a Representative of an authorised FSP can be a more practical and cost-effective route, provided there is a formal mandate and appropriate oversight in place.
2. Enter into an intermediary agreement with a licensed insurer
If a funeral parlour intends to act as an intermediary – selling, marketing or administering funeral policies on behalf of an insurer – it must have a formal intermediary agreement in place with a licensed insurer. This agreement sets out the scope of activities the funeral parlour is authorised to perform, such as collecting premiums, submitting applications or providing client servicing. Importantly, the policies themselves must be underwritten by the insurer, who assumes the financial liability for claims. This structure ensures compliance with regulatory requirements and protects both the policyholder and the funeral parlour from the risks of self-insurance.
Safeguarding business and building trust
The funeral industry is a vital part of South Africa’s economy, offering a much-needed service during difficult times. However, the practice of selling unregulated funeral insurance policies not only exposes funeral parlours to legal and financial risks but also puts consumers at significant financial vulnerability. By ensuring that all funeral policies are properly licensed and underwritten by a registered insurer, the industry can regain consumer trust and protect the interests of both businesses and the public.
Funeral parlours must act now to comply with the FAIS and Insurance Acts, securing the necessary FSP licence and entering into intermediary agreements with licensed insurers. Through these steps, the industry can offer consumers a reliable, trustworthy service while safeguarding their own businesses from the risks of non-compliance.
Do you need assistance with your compliance?
Masthead can help. We have a wealth of experience supporting businesses in meeting their compliance obligations, including adherence to the FAIS and Insurance Acts.
Our compliance experts can assist funeral parlours in navigating the complex regulatory environment – whether it’s applying for an FSP licence, entering into intermediary agreements or meeting ongoing compliance requirements.
With our support, funeral parlours can stay on the right side of the law while focusing on delivering trusted, professional service to their clients.
For more information, get in touch with us or contact the regional office closest to you.