2.12 Prepaid Funeral Services. Introduction. Scope and Objectives

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1 Introduction The Department of Government Services and Lands is responsible for a number of Government s services to the public, including protection of consumers. The Department s Trade Practices and Licencing Division is responsible for the administration of the prepaid funeral services program. This includes the licensing and regulating of funeral homes to sell prepaid funerals. The Prepaid Funeral Services Act was assented to on 12 May 2000 and came into force on 22 December Regulations under the Act, the Prepaid Funeral Services Regulations, also came into force on 22 December One of the main purposes of the legislation is to protect consumers who have entered into prepaid funeral contracts from financial loss, in the event of the failure of a funeral home. The purpose of the Regulations is to establish uniform requirements for prepaid funeral contracts. The Act also establishes a Consumer Protection Fund for Prepaid Funeral Services (Assurance Fund) to reimburse consumers who lose their investment due to the failure of a funeral home. Over the past five years, there were an average of 4,340 deaths per year in the Province. Documentation on file at the Department indicates that there are currently 91 funeral homes in operation in the Province. These 91 funeral homes are owned by 50 companies. Based on the information the Department has available, these 91 funeral homes have approximately 6,250 prepaid funeral service contracts outstanding. Also based on the information the Department has available, it is estimated that the average prepaid funeral service contract amount is $5,600. Therefore, there is an estimated $35 million in outstanding prepaid funeral service contracts between consumers and the funeral homes. The Prepaid Funeral Services Act requires that monies received from consumers for prepaid funeral contracts be kept in a separate trust fund at a financial institution. Scope and Objectives We completed our review of prepaid funeral services in March Our review covered the period from 22 December 2000, when the Act and Regulations came into force, to 31 March Our objective was to determine Government s progress on the implementation of this new prepaid funeral services program. Auditor General of Newfoundland and Labrador 131

2 Conclusions The Prepaid Funeral Services Act was assented to in May 2000 and came into effect on 22 December At the time of our review in March 2002, the Department had made very little progress with the implementation and administration of the prepaid funeral services program. With the exception of two letters issued to the funeral homes during June 2001, one related to the licensing of funeral homes and the other related to the requirements of the Assurance Fund, there was little or no follow-up performed by the Department. The Department had not established policies and procedures for the program and did not hire a full-time employee to administer the program until January At the time of our review in March 2002, only 28 of the 91 funeral homes in the Province had submitted licence applications. Of these 28, 27 were licensed although only 4 of these homes had fully complied with all requirements of the Prepaid Funeral Services Act and Regulations. Furthermore, while all of the 27 licensed funeral homes have paid their required licence fee, 13 have not paid the required Assurance Fund assessment. A total of $137,830 was paid from the Assurance Fund bank account from 6 April 2001, the date the account was established, to 31 March These payments were for claims arising from prepaid funeral contracts resulting from the failure of a funeral home in Port aux Basques in November At that time 88 consumers had purchased prepaid funerals from the funeral home valued at a total of $492,790. The $137,830 paid from the Fund related to 23 of the 88 contracts. Although the Act did not come into effect until December 2000, an amendment was made in May 2001 to retroactively honour claims against licensed funeral homes as though the Act had come into effect on 1 November However, the failed Port aux Basques funeral home was never licensed under the Act. Therefore, there was no authority under the Act for payments to be made based on claims arising from the failure of the funeral home. Findings and Recommendation The Prepaid Funeral Services Act was assented to in May 2000 and came into effect on 22 December Regulations under the Act, the Prepaid Funeral Services Regulations, were also proclaimed into effect on 22 December Responsibility for administering the Act was assigned to the Minister of Government Services and Lands. The Trade Practices and Licensing Division of the Department of Government Services and Lands was assigned the administration and implementation of the prepaid funeral services program. 132 Auditor General of Newfoundland and Labrador

3 Although the Act came into effect on 22 December 2000, the Department did not contact the funeral homes to advise them of the requirements of the new legislation until a letter was issued on 4 June In that letter, the Department advised the funeral homes of the new Prepaid Funeral Services Act and Regulations and advised them of the establishment of the Assurance Fund which is to be used to compensate consumers in the event of a claim arising out of a prepaid funeral contract. Funeral homes were requested to remit the requiredassurance Fund assessment fees. On 27 June 2001, the Department issued another letter to the funeral homes advising them of the licensing requirements and related licensing fee. There was an enclosed licence application form that was required to be completed and returned, along with a cheque for the current licence fee, to the Department. In January 2002, the Department hired a financial analyst to be the administrator of the prepaid funeral services program and the Assurance Fund. 1. Application and Licensing The Act requires that funeral homes be licensed on an annual basis to sell prepaid funeral services. To be licensed, a funeral home must submit an application within 90 days after the funeral home s year end. The licence application specifies the following: applicant information; financial institution for the applicant s prepaid funeral trust fund; licence fee calculated as 1/10 of 1% of prepaid funeral contracts outstanding, with a minimum fee of $100 and a maximum fee of $750; audited financial statements pertaining to the applicant s prepaid funerals and its trust account; and sample copy of a prepaid funeral services contract. Auditor General of Newfoundland and Labrador 133

4 Our review of the prepaid funerals application and licensing process indicated that, although the Prepaid Funeral Services Act came into effect on 22 December 2000, as at 31 March 2002 no applications have been received from 63 of the 91 funeral homes. The Department issued a letter to the funeral homes on 27 June 2001 requesting that the enclosed application form be completed; however, the Department did not followup with the 63 funeral homes which did not respond to determine whether they are required to be licensed. Our review of the applications submitted to the Department by the 28 funeral homes indicated that, although only 6 of the 28 provided all of the required information, only 1 of the remaining 22 funeral homes was not issued a licence. In that instance, the funeral home did not provide the licence fee. Issues related to the 22 incomplete applications are as follows: 18 did not submit the required audited financial statements with their application; and 11 did not submit a sample copy of a prepaid services contract. The Department has not established policies for the administration of the prepaid funeral services program including procedures for staff to follow when applications are incomplete or late. 2. Consumer Protection Fund for Prepaid Funeral Services The Consumer Protection Fund for Prepaid Funeral Services (the Assurance Fund) was established pursuant to section 5 of the Prepaid Funeral Services Act. The purpose of the Assurance Fund is to pay claims arising out of a prepaid funeral contract against a funeral home licensed under the Act. The Assurance Fund consists of money paid into the fund by the funeral homes, any monies borrowed under the Act and the interest earned on monies in the fund. The Act requires funeral homes that are licensed to sell prepaid funerals to pay into the Assurance Fund an amount of money based on the amount of prepaid funeral contracts. The Regulations specify the calculation for the assurance fund assessment as 1% of the cost of a prepaid funeral contract, the cost calculated as the total contract price reduced by fees and commissions and the cost of the purchase of a cemetery plot. 134 Auditor General of Newfoundland and Labrador

5 The costs and expenses in administering the Assurance Fund are to be paid from the fund. Section 5(4) of the Act states that the Minister may establish a board to administer the Assurance Fund. The Assurance Fund is required to be audited annually and a report on the audit is to be submitted to the Minister not more than 90 days after the end of the year (i.e. 30 June). Our review of the Assurance Fund indicated the following: The Assurance Fund bank account was established 6 April At 31 March 2002, the account was in overdraft by $118,561. The following transactions have occurred to date: Activity Source: Consumer Protection Fund for Prepaid Funeral Services Amount Assessments $21,987 Payments related to claims arising from prepaid funeral contracts (137,830) Bank overdraft interest and service charges (2,718) Balance ($118,561) In accordance with the Regulations, one condition which may force the payment of claims from the Assurance Fund is the bankruptcy of a funeral home licensed to sell prepaid funerals. The $137,830 in payments for claims arising from prepaid funeral contracts resulted from the failure of a funeral home in Port aux Basques in November 2000 where 88 consumers had purchased prepaid funerals totalling $492,790. The $137,830 paid from the Fund at the time of our review relates to 23 of the 88 contracts. Although the Act did not come into effect until December 2000, an amendment was made in May 2001 to retroactively honour claims against licensed funeral homes as though the Act had come into effect on 1 November However, the failed Port aux Basques funeral home was never licensed under the Act. Therefore, there was no authority under the Act for payments to be made based on claims arising from the failure of the funeral home. Auditor General of Newfoundland and Labrador 135

6 In accordance with the authority provided under the Act, the Minister has entered into an agreement with the bank for a $200,000 overdraft credit facility. This $200,000 line-of-credit is guaranteed by the Province. Although the Department has issued licences to 27 funeral homes, 13 of the 27 licensed homes have not paid the required Assurance Fund assessment. The Minister has not exercised the option to establish a board to administer the Assurance Fund. The Minister has however appointed an administrator of theassurance Fund. The first complete year for the requirement under the Act to audit and report to the Minister on theassurance Fund is 31 March 2002 which is due by 30 June In May 2002 and subsequent to our review of the program, we were requested to perform the audit of theassurance Fund. Recommendation The Department should increase its activity regarding the implementation and administration of the Prepaid Funeral ServicesAct and Regulations. Department s Response First, I wish to place in context the environment in which the legislation was implemented. The main purpose of the legislation is to protect consumers who have entered into prepaid funeral contracts from financial loss, in the event of the failure of a funeral home. The Prepaid Funeral Service Program was challenged to meet this mandate even before the Prepaid Funeral Services Act, (the Act ), came in effect in December of The bankruptcy of a Port aux Basques funeral home in November of 2000 necessitated the efforts of the Department shifting from implementation to consumer protection. There were 88 consumers, most of whom were elderly, and their families who found themselves involved in a criminal investigation, without their prearranged funeral services and with a financial loss of the funds paid under each prepaid contract. 136 Auditor General of Newfoundland and Labrador

7 There were the three immediate demands placed upon the Department; participation in a criminal investigation; securing funeral services for the affected persons; and financing of any potential solution. Limited human resources were quickly consumed in working with the Commercial Crime Division of the RCMP, the Newfoundland and Labrador Funeral Services Association, industry representatives and the many purchasers of prepaid funeral contracts. The end results of these efforts were a conviction of theft and false pretense by the owner of the funeral home, full restitution order granted to the Department and the provincial funeral industry honoring contracts sold to affected individuals. To date the mandate of the Prepaid Funeral Services Program and the Department of Government Services and Lands to protect the public interest has been attained. 1. Application and Licensing During the implementation of the Act the Department has encountered a number of human resource issues. All of this work had to be carried out by existing staff as it takes time to recruit staff for any new program. Since hiring of the program administrator, the Department has implemented actions which has resulted in an increase in applications received from an estimated 31% of funeral homes operating in the province to 86%. A funeral home is only required to make application if they plan to sell prepaid funeral contracts as defined by the Act. 58% of funeral homes have submitted financial statements, up from 11%; 100% of provincial funeral homes have been contacted through registered correspondence and have had subsequent contact made by the Department. To date 35 licences have been issued to funeral homes, with new licences issued only when an applicant provides all required documentation. It should be noted that there are funeral homes with no intention of selling prepaid funerals. As a result, compliance with the licensing component of this program is likely higher than the aforementioned would indicate. 2. Consumer Protection Fund for Prepaid Funeral Services It was not anticipated that any funeral home would have gone out of business before the Act was assented to, and therefore the Act provided for payments out of the Consumer Protection Fund for funeral homes licensed under the Act. Obviously, since Ford s Funeral home went out of business just prior to the Act coming into force, it was never licensed. The retroactive amendment to the Act was made specifically to address the Ford s situation so its clients would be protected. We will address this issue with the Department of Justice to determine if a further amendment is required. Auditor General of Newfoundland and Labrador 137

8 The Department acknowledges that much work is required to implement and administer the Prepaid Funeral Services Program, including the establishment of policies and procedures. Significant advances have been achieved since measures were implemented to protect consumers affected by the failure of the funeral home in Port aux Basques. Funeral homes operating throughout the province have subsequently received registered notification of the requirements imposed by the Act. The Department has delivered presentations to the general public and to an embalmers and funeral directors training seminar conducted on April 5, The Department is currently working with applicants to ensure all requirements under the Act are met and only then is a licence issued. 138 Auditor General of Newfoundland and Labrador