The Financial Services Compensation Scheme (FSCS) has said it will not provide protection for consumers who have a funeral plan with a provider that goes bust.
Although funeral plan providers can choose to be regulated by the Financial Conduct Authority (FCA), the FSCS said in a note on its website neither FCA regulated nor unregulated firms will be covered by the lifeboat fund if they fail because their products "are not categorised as a ‘designated investment' under FSCS's compensation rules".
However, the FSCS said in some "limited circumstances" it may be able to pay compensation, for instance when a whole of life insurance policy or the provider of a product held within a trust, goes bust.
The scheme said this was because funeral plan providers relied on insurance companies and investment trusts to meet their obligations to customers. Funeral plans are often sold by a financial adviser to their client for a commission from the provider.
FSCS added it would be unlikely to pay compensation directly to individual customers. The funeral plan provider or the trustees of the investment fund would need to decide what to do with any money paid out by the fund.
The FSCS stressed it was not responsible for the decisions funeral plan providers or investment fund trustees may make with any compensation paid.
Managing director of consumer champion firm Fairer Finance, James Daley, said: "We're delighted to see the FSCS bringing some clarity to where its coverage lies and doesn't lie around funeral plans.
"The fact remains that no funeral plan customers have recourse to FSCS if their plan provider was to become insolvent. Yet most people think funeral plans are subject to the same regulation and consumer protection as general insurance products."
Staff are your responsibility
More than 4,500 retail investors affected
Paid out £54m in related compensation
Changes to take place by next year