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our proposed budget for 2011/2012

in this chapter:

  • We set out our financial plans for 2011/2012. As we explain in chapter 3, these plans take into account our aim to keep overall costs low by improving efficiency - while saving money to invest in developing our service for the future.
  • We explain the challenge of deciding what level of financial reserves to keep, given the current levels of uncertainty about case volumes.

As we explained earlier in this document, we have had a challenging year so far in 2010/2011, with levels of demand differing significantly from those that we and industry stakeholders had forecast. At the same time, our costs are rising as a result of the more complex cases we are now seeing - and the significant increase in the number of requests for a final decision by an ombudsman. We do not expect the 2011/2012 financial year to be any less challenging.

total income and expenditure

Reflecting the workload provided by our three jurisdictions (compulsory, consumer-credit and voluntary), our total budget expenditure for 2011/2012 is divided as follows:

  • 97.5% relates to our compulsory jurisdiction (which covers firms regulated by the FSA).
  • 1.7% relates to our consumer-credit jurisdiction (which covers businesses other than FSA-regulated firms that have a standard consumer-credit licence issued by the Office of Fair Trading).
  • 0.8% relates to our voluntary jurisdiction (which covers a small number of financial businesses that have chosen to be covered by the ombudsman service - but that would not otherwise come under our jurisdiction).

Our aim is to freeze the case fee and underlying levy for 2011/2012 (for the second year running). We plan to do this by absorbing inflationary pressures and the additional case-handling costs we are facing - while making savings to release funds for investing in the future development of our service.

Achieving this relies on levels of demand for our service falling within the ranges we have indicated in chapter 4. If these levels of demand are correct, then we expect to be able to set a budget for 2011/2012 totalling between £90 million and £116 million. However, this does not take into account any additional costs in our compulsory jurisdiction associated with challenges to progressing PPI cases - arising out of the British Bankers Association's judicial review of PPI-related matters.

Significantly higher, or lower, levels of demand can put our financial model under greater stress - as we know from the financial pressures we have experienced during the current financial year. Later in this chapter we explain how we plan to review our policy on financial reserves, to address significant shifts in the level of demand within our compulsory jurisdiction.

unit cost and cost savings

Our unit cost represents our total costs for the year (apart from the cost of financing) - divided by the number of cases we have resolved.

Our unit cost at the end of the 2010/2011 financial year is currently forecast to be a little over £600. This will be around 10% over budget - reflecting rising case-handling costs caused by: the increased complexity of cases, the larger proportion of cases now requiring a final decision by an ombudsman, and volatility in the "case mix".

For the 2011/2012 financial year we plan to reduce our unit cost to below £600 - which will involve a cost-savings exercise to cut our cost base by around 10%. The final unit cost figure will depend on actual case volumes during the year.

We are currently part-way through the cost-savings exercise. As a result of re-negotiating our major contracts we have already reduced our cost base by around 4%. We believe we can make the remainder of our planned savings by improved efficiencies and by streamlining our operational processes. We are working on plans to achieve this.

investment in developing our service

As we explained in chapter 3, we have two priorities for investing in the development of our service. Our first priority is to invest in technology - to reduce the costs of "doing business" with us, and to improve people's experience of our service. Our second priority is to invest in the professional development of our staff.

We believe that these investments will benefit our customers through higher levels of service and professional quality - and through lower overall costs of dealing with us, in the case of the businesses that fund us. We are confident that we can fund these investments through the internal efficiencies and cost savings that we are committed to making.

our staff

Over 80% of our cost base relates to our staffing costs. This means that the way in which we manage our staff resource is a significant issue in setting and managing our budget. We publish our pay scales - and show the number of people in each pay band. Over half of our permanent employees are adjudicators in a pay band that ranges from £21,500 to £54,809.

As we explained in chapter 2, we have increased the number of our case-handling staff in 2010/2011 to cope with rising levels of demand. We have also made a commitment to develop our staff in terms of their professional skills, expertise and knowledge. We described in chapter 2 how and why we have further increased our team of ombudsmen.

In chapter 3 we set out how we plan to launch an enhanced career model that encourages and enables the professional development of case-handling staff through to the role of ombudsman. Chapter 3 also explains how we plan to review the workforce balance between our contractors and our permanent staff, to ensure we have the optimal arrangements to give us flexibility, efficiency and quality.

The table below shows the number of staff we forecast we will need by the start of the 2011/2012 financial year. However, we are likely to have to increase or decrease these numbers in response to changes in levels of demand throughout the year.

staff budget
March 2011
forecast
March 2011
budget
March 2012
ombudsmen 70 70 70 to 90
front-line customer-contact staff 125 120 110 to 140
casework divisions (including adjudicators) 1,271 1,092 920 to 1,360
support staff 148 147 140 to 170
total 1,614 1,429 1,240 to 1,760

building our reserves in the compulsory jurisdiction - and planning for significant shifts in demand for our service

In recent years our policy has been to keep reserves at 5% of our annual expenditure. We started the current financial year (2010/2011) with reserves of £14 million - slightly higher than the usual level. This arose from a large batch of cases we closed at the end of the 2009/2010 financial year - following the Supreme Court's ruling on unauthorised-overdraft charges.

We currently expect to have reserves of around £6 million at the end of this financial year (2010/2011) - subject to the operational uncertainties arising out of the British Bankers Association's judicial review of PPI-related matters.

Our workload is inherently difficult to forecast with any degree of certainty. A wide range of external factors can affect the case volumes and "case mix" referred to us. This is why we are now focusing on improving our operational resilience to cope with peaks and troughs in demand - as we explained in chapter 3. We take the view that we should build the operational capability to deal with moderate swings in demand - in keeping with the ranges outlined in this document. But we also need to plan how we would deal with a shift in demand outside these ranges.

We believe the risk of a significant shift in levels of demand is more likely to increase than to decrease. The factors increasing the risk include the growth in "mass claims" involving sudden large surges in complaints about the same product or topic. Even the regulator's new powers to intervene in circumstances like this - using the new "section 404" to set up a consumer redress scheme - could result in significant fluctuations in our workload if, for example, the regulator's intervention led to volumes of cases suddenly stopping.

The future volume of PPI cases is particularly difficult to forecast. The British Bankers Association's judicial review of PPI-related matters adds significant uncertainty to our plans and forecasts - both in relation to the number of new PPI cases we can expect to receive and the extent to which we will be able to progress those cases.

We may not know the final outcome of this legal action much before the end of the 2011/2012 financial year. This means we could face some extreme (but far from implausible) operational and financial scenarios which might result in our incurring substantially increased costs with far lower income. For example, if financial businesses were to decide to suspend cooperation on PPI cases as a result of the legal action, our loss of income from case fees in just one month could lead to an operating monthly deficit of up to £4 million. This would exhaust our reserves within six weeks.

The consequences of this for the ombudsman service in the current financial year and in 2011/2012 could involve an amount totalling between £10 million and £30 million - well in excess of our reserves.

Our board has an obligation to set a budget which meets the anticipated costs of the ombudsman service and keeps a prudent level of financial reserves. The board's view is that a budget which did not take account of the likely contingencies that face us would be deeply imprudent.

The board believes that to reflect these uncertainties we need to plan on the basis of a significantly higher level of reserves in relation to the compulsory jurisdiction. The alternative - waiting to see what happens and managing fluctuations by running a significant overdraft - would be inappropriate and inconsistent with our operating principles.

Our board has therefore been considering what an appropriate level of reserves might be. Our analysis currently suggests a significant increase in the level of reserves - perhaps up to 20% or 25% of our annual expenditure. An increase in our reserves will require a corresponding increase in the compulsory jurisdiction levy, because it is the compulsory jurisdiction where the volatility and risks lie.

We will need to make a final decision on the level of our reserves in March 2011. This is because the law requires our annual budget to be set by our board and approved by the FSA before 1 April each year.

Our board will, of course, monitor these reserves to ensure they are used only to cover volatility - and do not mask any "business as usual" issues.  And our stakeholders will have the additional assurance of the upcoming value-for-money review by the National Audit Office.

funding our service in 2011/2012

The majority of our funding comes from case fees. The rest of our funding comes from annual levies.

case fees

For all three of our jurisdictions (see below), the amount of the case fee is set by the Financial Ombudsman Service and approved by the FSA.

Each business has three free cases a year. For the fourth case - and any subsequent case - we charge a case fee of £500, once the case is resolved. We propose to freeze the amount of the case fee at £500 in 2011/2012 - for the second year running.

compulsory jurisdiction levy

The levy payable by FSA-authorised firms is set by the FSA. The FSA also collects the levy - as part of a combined invoice that includes the levies for the Financial Services Compensation Scheme (FSCS) and for the FSA itself.

In line with the approach described above, we will be asking the FSA to set a levy that covers both the total levy for 2010/2011 and an appropriate addition to our reserves. The FSA will consult on the total amount of the levy - and on how it should be allocated among industry blocks - as part of its wider consultation that also covers the FSA and FSCS levies.

We understand that the FSA's consultation on the levies is due at the beginning of February 2011. Broadly, allocation of the total levy among regulated firms involves two stages:

  • The total levy is divided among industry blocks (based on activities) according to the number of case-handling staff we expect to need for cases from that sector.
  • The levy for each industry block is divided among the firms in that block, according to a tariff rate (relevant to that sector) which is intended to reflect the scale of the firm's business.

This means that the share of the levy allocated to a particular industry block may change, even though the total levy remains the same. The funding mechanism (in the FEES 5 section of the FSA's Handbook) requires the total levy to be allocated in this way. It does not allow the underlying levy and the additional reserves to be allocated in a different way. For example, the levy cannot be targeted on particular financial businesses.

consumer-credit jurisdiction levy

The total for the consumer-credit jurisdiction levy is set by the ombudsman service and approved by the FSA. The amount payable by individual businesses that have a consumer-credit licence is set by the Office of Fair Trading (OFT) - and collected with the licence fee from businesses that take out or renew a standard consumer-credit licence during the year.

In view of this, we have agreed with the OFT to "average out" the levy over the 5-year renewal period for consumer-credit licences. In line with this, the total levy for the consumer-credit jurisdiction in 2011/2012 has been set at £2.4 million (net of the OFT's collection costs) - the same figure as in 2010/2011. The fluctuations in the figures shown in the budget reflect when the revenue from the consumer-credit jurisdiction is recognised in line with workload. The amount collected from businesses does not change.

voluntary jurisdiction levy

The voluntary jurisdiction levy payable by the relevant businesses is set by the ombudsman service and approved by the FSA. It is collected by the ombudsman service. The rates proposed for 2011/2012 are set out in annex C. None of these rates have been increased.

our overall funding structure for 2012/2013 and beyond

We know that some businesses have strong - and sometimes mutually conflicting - views on the funding structure of our compulsory jurisdiction. We and the FSA have consulted periodically on the principles involved - and annually on the actual figures.

Within the constraints set by the Financial Services and Markets Act 2000 we have deliberately chosen a simple funding structure that avoids the administration costs, paid for ultimately by the industry, that would necessarily arise if judgements had to be made about different fees for different cases.

When the ombudsman service was established ten years ago, the funding of our compulsory jurisdiction came 50% from case fees and 50% from the levy. This has shifted over time - so that for the current year, the funding of the compulsory jurisdiction is forecast to come 80% from case fees and 20% from the levy. This means that funding is more closely related to the number of cases received from individual businesses. But it also introduces a significant element of potential instability into our funding.

We froze the case fee and the total levy in 2010/2011. By making efficiency savings of 10%, we propose to freeze them again in 2011/2012 - unless any increase in the compulsory jurisdiction levy requires us to increase our reserves. Even if the compulsory jurisdiction levy rose to increase our reserves by £20 million, case fees would still make up around 67% of the funding in this jurisdiction.

We do not believe it would make sense to change this structure for next year (2011/2012). However, we welcome views on the right balance between the case fee and levy - and on the number of "free cases" - going forward.

what this means for our overall income and expenditure plans - our proposal for 2011/2012

With the levels of demand we have forecast for 2011/2012, we expect to be able to set a budget for an amount between £90 million and £116 million. We have also forecast a range of scenarios in relation to our reserves - from a zero increase through to a £30 million increase - which we have assumed will be an addition to the compulsory jurisdiction levy.

There is more detail about our overall income and expenditure plans in the following chart.

income and expenditure

  2009/10
2010/11
2011/12 budget
 

actual

budget
forecast low medium high
income (£m)            
compulsory jurisdiction levy 18.3 17.7 17.9 17.7 17.7 17.7
consumer-credit jurisdiction and voluntary jurisdiction 2.3 1.8 2.6 2.8 2.8 2.8
case fees 78.4 94.5 81.2 69.9 82.8 95.7
other income 0.2 0.2 0.2 0.1 0.1 0.1
provision for bad/doubtful debt -0.9 -0.5 -0.5 -0.8 -0.8 -0.8
total 98.4 113.7 101.4 89.8 102.7 115.6
expenditure (£m)            
staff and staff-related costs 78.4 99.7 92.8 73.8 83.5 92.6
professional fees 1.3 1.6 1.8 1.3 1.3 1.3
IT costs 1.8 1.8 2.1 2.1 2.3 2.5
premises and facilities 6.1 7.0 6.6 6.6 6.6 7.2
other costs 3.0 3.5 4.1 4.0 4.0 4.0
depreciation 1.8 1.9 2.0 2.0 2.0 2.0
investment - - - 1.0 3.0 3.0
total operating costs 92.4 115.5 109.4 90.8 102.7 112.6
financing costs 0 0.2 0 0 0 0
surplus / deficit (£m) 6.0 -2.0 -8.0 -1.0 0 3.0
case closures 166,321 210,000 180,000 152,000 180,000 208,000
unit cost (£) 555 550 608 597 571 541
case fee (£) 500 500 500 500 500 500
free cases 3 3 3 3 3 3

your feedback

We are keen to receive input from all our stakeholders on:

  • Our overall aims - and the plans we have outlined for the coming year (2011/2012), particularly in terms of priorities for developing our service.
  • What volumes of new cases stakeholders expect us to receive - and whether the ranges we have set for case volumes seem reasonable.
  • Whether stakeholders believe that volumes of complaints about PPI sales will rise or fall - and by what level.
  • Our proposals to freeze the total levy and case fee (other than for any increase in our reserves) - and what the case fee and levy balance should be, going forward.
  • What stakeholders believe our position on financial reserves should be - and how this should be funded.

We welcome your feedback on our plans and budget for 2011/2012. Please send your views and comments - to reach us by Monday 21 February 2011 - to adrian.dally@financial-ombudsman.org.uk. Or write to:

Adrian Dally
Financial Ombudsman Service
South Quay Plaza
183 Marsh Wall
London  E14 9SR

We may want to publish the responses we receive to this consultation paper. If you would like your response or name to be kept confidential, please ensure you make this clear in your response.

If you reply by email, we will take it that your consent to our publishing your response overrides any confidentiality disclaimer that your organisation's IT system may add automatically to your email - unless you specifically include a request for confidentiality in the main text of your response to us.