Loophole Closed for Funeral Funds

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By Ariane Thierry, Lawyer

As a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission), from 1 April 2020, organisations that sell funeral expenses facilities must hold an Australian financial services licence (AFS licence).

The Royal Commission Findings

In the Final Report for the Royal Commission, Commissioner Kenneth Hayne acknowledged that funeral insurance policies offered by funeral expenses facilities provided little value to consumers.[1] Indeed, Commissioner Hayne confirmed that the amount paid out in claims in the 2014 financial year was around a third of the value of premiums collected that year.[2] Further, some consumers held policies with premiums that increased based on their age, and Aboriginal and Torres Strait Islander people were more likely to be sold a funeral insurance policy. It was apparent that the industry was taking advantage of vulnerable members of the community.

Commissioner Hayne noted that funeral expenses policies were exempt from being considered a ‘financial product’ under section 765A(1)(y) of the Corporations Act 2001 (Cth) (Corporations Act) and regulation 7.1.07D of the Corporations Regulations 2001 (Cth) (Corporations Regulations). The exemption meant that funeral expenses facilities were not required to hold an AFS licence and were therefore not required to fulfil various obligations under the Corporations Act. To Commissioner Hayne, this exemption was unjustified and should be removed.[3]

Prior to 1 April 2020

Prior to 1 April 2020, facilities that provided funeral benefits[4] and funeral expenses policies[5] were exempt from being defined as a ‘financial product’ under the Corporations Act, and, therefore, were exempt from being required to operate with an AFS licence. Following the legislation being repealed, funeral expenses policies are now no longer exempt. Hence, organisations will need an AFS licence if they provide funeral expenses policies which satisfy either the general definition or the specific definition of a financial product under the Corporations Act.[6]

Definition of a Funeral Expenses Facility

A funeral expenses facility is a “scheme or arrangement for the provision of benefits consisting of the payment of money, on the death of a person, for the purpose of meeting the whole or a part of the expenses of, and incidental to, the funeral, burial, or cremation of the person.”[7]

New Requirements

From 1 April 2020, funeral expenses facilities that meet the definition of a financial product under either sections 763A or 764A of the Corporations Act must hold an AFS licence and comply with the corresponding obligations attached to that AFS licence.

Facilities that provide funeral benefits under section 765A(1)(w) of the Corporations Act are still exempt from being defined as a financial product and are thus unaffected by these changes. A funeral benefit involves the provision of funeral, burial or cremation services.[8]

If an organisation was previously exempt under regulation 7.1.07D of the Corporations Regulations, and it already holds an AFS licence, that organisation’s exemption will continue to apply until 1 January 2021. This means that its facilities will not be considered a financial product until 1 January 2021, the organisation will not comply with any new licensing requirements and corresponding obligations, and that organisation has until 31 December 2020 to vary its existing AFS licence.

Distributors and financial advisers that deal with funeral expenses facilities provided by an organisation without an AFS licence must comply as of 1 April 2020 with the additional obligations. Those distributors and financial advisers that deal with funeral expenses facilities that already have an AFS licence have until 1 January 2021 to comply with the new changes.


Section 911A(2) of the Corporations Act and regulation 7.6.01 of the Corporations Regulations will still be available as exemptions to holding an AFS licence, provided an organisation satisfies the exemption criteria. These exemptions restrict the kind of conduct in which an organisation may engage.

A new exemption has been enacted specific to funeral service providers that engage in financial services by distributing funeral expenses policies that are issued by friendly societies.[9] The exemption covers, for example, funeral directors and those that distribute products in the ordinary course of their business as a funeral service provider. The product must be issued by a friendly society.

An application for individual relief can also be sought by applying to the Australian Securities and Investments Commission (ASIC) for an exemption from holding an AFS licence. Further, some organisations that cover their members under group policies may be able to rely on the ASIC Corporations (Group Purchasing Bodies) Instrument 2018/751, for relief.

Obligations as an AFS Licensee

There are various obligations for AFS licensees arising from Parts 7.6-7.9 of the Corporations Act.  Amongst other obligations, AFS licensees have anti-hawking obligations, specific obligations relating to their dealings with the ASIC and disclosure obligations. Organisations applying for an AFS licence must show that they can meet those obligations. It is important for funeral expenses facilities to be aware of these obligations, as ASIC can cancel, suspend or impose conditions on the AFS licence of organisations that breach their obligations.

[1] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, February 2019) vol 1, 285.

[2] Ibid.

[3] Ibid 287.

[4] Corporations Act 2001 (Cth) s 765A(1)(w).

[5] Corporations Regulation 2001 (Cth) reg 7.1.07D

[6] Corporations Act 2001 (Cth) ss 763A, 764A.

[7] Ibid s 761A.

[8] Ibid.

[9] Corporations Regulations 2001 (Cth) regs 7.6.01(1)(ta), 7.6.01(7).

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