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corporate plan & 2006/07 budget - 2006/07 budget and case fees

income and expenditure For 2006/07 we are proposing a balanced budget, with income and expenditure of £59.2 million. In addition, we expect to incur £1.5 million capital expenditure on:

  • replacing our telephone system (which we have outgrown);
  • continued development of our computerised casework system; and
  • upgrading our IT infrastructure and carrying out building improvements.

actual 2004/05 £m

budget 2005/06 £m

forecast 2005/06 £m

budget 2006/07 £m

income

levy

12.4

12.8

11.2

15.8

return of surplus

-

(1.7)

-

-

case fees

31.2

40.0

40.5

43.2

other income

0.4

0.0

0.0

0.2

total

44.0

51.1

51.7

59.2

staff and staff-related costs

34.7

41.1

41.5

46.1

professional fees

0.6

0.8

0.8

0.7

IT costs

1.7

1.7

1.8

2.2

premises and facilities

4.8

5.7

5.8

6.1

other costs

1.1

0.6

0.5

0.5

depreciation

2.7

2.9

2.9

3.3

operating costs

45.6

52.8

53.3

58.9

financing costs

0.2

0.3

0.3

0.3

total costs

45.8

53.1

53.6

59.2

surplus(deficit)

(1.8)

(2.0)

(1.9)

0.0

cases resolved

90,908

116,000

116,000

125,000

unit cost

£496

£456

£457

£472

We expect expenditure to be 10% higher than in 2005/06, mainly because of increased staff and IT costs.

Staff costs reflect:

  • the full-year cost of new staff recruited during 2005/06 to deal with the increasing volume of cases and strengthen our management team;
  • the cost of the staff recruited in recent years (to deal with our increasing workload) now progressing to 'benchmark' salary rates;
  • the salary cost of retaining experienced staff in a competitive environment; and
  • additional pension-matching contributions.

We expect IT costs and depreciation to increase as a result of the revenue effect of the capital expenditure described above.

unit cost The low unit cost of £457 that we expect in 2005/06 is assisted by factors which will not recur in 2006/07. In particular, implementing the FSA’s mortgage endowment strategy has had two effects. First, it has facilitated the resolution of some cases from larger firms during 2005/06. Second - as explained earlier - it has begun to reduce the proportion of mortgage endowment cases from larger firms.

As the consequent economies of scale reduce in 2006/07, our projected unit cost increases slightly to £472. This unit cost is similar to the 2004/05 figure and lower than the 2003/04 figure. It continues to compare favourably with the 2000/01 average of about £750 for the schemes we replaced.

The increasing number of complaints resolved by our customer contact division demonstrates an improved service to consumers and firms. But because complaints that are resolved at this stage do not count as cases when we calculate the unit cost - they have the effect of raising the apparent unit cost.

staff For 2006/07 we have assumed a headcount of 1,018. The small increase is mainly for staff to enhance our quality and business-improvement activities.

actual 2004/05

budget 2005/06

forecast 2005/06

budget 2006/07

casework divisions and ombudsmen

709

751

779

781

customer contact division

102

96

105

105

external liaison and publications

23

22

22

22

knowledge, information and policy

15

20

21

21

service quality

13

14

19

21

support services

63

66

66

68

total

925

969

1012

1018

source of income Parliament decided that the ombudsman service should be free to consumers and funded by the industry, like the former industry-led schemes. After consultation it was decided that our income should be derived in two ways. All firms pay an annual levy, and those firms involved in cases we resolve also pay a case fee. In 2004/05 we introduced arrangements whereby the first two cases brought against a firm each year are free.

review before 2007/08 The existing funding arrangements apply to firms of all types and sizes. But it has become apparent that the current model impacts very differently on the largest firms - which provide the majority of our cases and income - and on smaller firms. During this current consultation, and during 2006/07, we will discuss with stakeholders the structure and balance of the case fee and annual levy, in order to explore whether there are practicable and better ways of sharing costs for the future, and the level for reserves.

As mentioned in chapter 4 - foundations for the future - we will discuss ways to:

  • further mitigate small firms' concerns about case fees;
  • improve allocation of costs among large firms, which provide most of our income; and
  • allow for firms brought in by the proposed consumer credit jurisdiction.

case fees for 2006/07 Currently, firms pay no case fee for the first two cases brought against them in any one year. After that, they pay a standard case fee of £360, or a 'special' case fee of £475. The ‘special’ case fee applies in a small minority of cases - mainly where the complaint has been made by a small business.

We propose to continue these arrangements for 2006/07. We expect to close 125,000 cases and (after allowing for the two ‘free’ cases per firm) to charge case fees totalling £43.2 million. This would provide 73% of gross income - compared to 78% in 2005/06 and 71% in 2004/05.

annual levy for 2006/07 The remainder of our expenditure (£15.8 million) would be raised through the 2006/07 annual levy. This would represent an increase of £4.6 million on the 2005/06 levy, although £1.7 million of the difference reflects a specific reduction in the 2005/06 levy in order to return to firms a surplus that had accrued from previous years.

Taking into account:

  • the forecast £1.9 million deficit for 2005/06;
  • the inclusion for the first time (to comply with accounting standard FRS17) of the deficit on the final-salary pension scheme (that applies to certain staff inherited from some former schemes); and
  • agreed reserves;

there is not expected to be any surplus to deduct from the levy for 2006/07.

balance between case fee and annual levy Our current proposals involve holding the standard case fee at the amount fixed five years ago. It has been suggested that some respondents might prefer an increase in the case fee to an increase in the levy. In preliminary discussions with industry representatives, we found no support for increasing the case fee - especially in view of the plan to review the structure of our funding during 2006/07. But we welcome comments on this point.

If the total levy were to remain at the 2005/06 level, the standard case fee would have to increase from £360 to about £400. This would result in case fees providing 81% of our gross income - with the increased case fee applying to cases resolved during 2006/07, whether they were received during that year or earlier.

impact of levy on firms The FSA will consult separately on the levy payable by firms in the compulsory jurisdiction. It consulted on the method of allocating the total levy among firms in its consultation paper CP74. Broadly the method involves two stages:

  • The total levy is divided among the fee 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 fee 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.

Although the total levy has increased, the effect of this on firms in different fee blocks is mixed. This is because the levy depends on the number of cases expected from firms in that fee block. In any event, we estimate that about 85% of firms will pay the minimum fee for their fee block.

Subject to consultation, typical consequences are likely to be:

firm

2004/05 levy

2005/06 gross levy*

2005/06 net levy**

2006/07 estimate

bank or building society with 2 million relevant accounts

£13,800

£9,053

£7,550

£11,630

general insurer with £100 million of relevant gross premium income

£8,100

£5,200

£4,400

£5,820

life office with £200 million of relevant adjusted gross premium income

£18,600

£22,000

£18,800

£27,000

an investment adviser that holds client money and has 50 relevant approved persons

£3,250

£5,250

£4,500

£7,500

three-partner firm of independent financial advisers that does not hold client money

£90

£90

£75

£105

mortgage or insurance intermediary firm

n/a

£50

£50

£50

*Gross levy is before the return of the £1.7 million surplus

**Net levy is after the return of the £1.7 million surplus