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corporate plan and 2007/08 budget

January 2007

2007/08 budget and case fees

income and expenditure

For 2007/08 we are proposing a balanced budget, with income and expenditure of £57.3 million. We also expect to incur £1.5 million capital expenditure on the continued development of our casework system and on replacing our telephone system (which is becoming difficult to support and maintain).

Out of our total income and expenditure:

  • 97.5% relates to our compulsory jurisdiction
  • 2.1% relates to our consumer credit jurisdiction
  • 0.4% relates to our voluntary jurisdiction.
income actual
2005/06
£m
budget
2006/07
£m
forecast
2006/07
£m
budget
2007/08
£m
levy 11.7 15.8 16.5 19.4
case fees 39.7 43.3 38.2 37.9
other income 0.0 0.2 0.0 0.0
total 51.4 59.3 54.7 57.3
expenditure actual
2005/06
£m
budget
2006/07
£m
forecast
2006/07
£m
budget
2007/08
£m
staff and staff-related costs 40.4 46.0 43.0 43.6
professional fees 0.5 0.6 0.7 0.8
IT costs 1.6 2.2 2.2 2.3
premises and facilities 5.6 6.2 6.1 6.4
other costs 0.7 0.7 0.6 0.7
depreciation 2.9 3.3 2.7 3.2
operating costs 51.7 59.0 55.3 57.0
financing costs 0.3 0.3 0.3 0.3
total costs 52.0 59.3 55.6 57.3
surplus (deficit) (0.6) 0.0 (0.9) 0.0
cases resolved 119,432 125,000 115,800 106,500
unit cost £433 £472 £477 £535

Our income forecast for 2006/07 is £4.6 million below budget, resulting from the decision to cap the number of adjudicators in post, which affected the number of cases resolved and closed. But the deficit of £0.9 million for 2006/07 will be financed from reserves, and so will not have to be recovered in 2007/08.

Our expenditure budget for 2007/08 is 3% lower than our expenditure budget for 2006/07; but it is 3% higher than our forecast for the actual spend in 2006/07 - mainly because of increases in pension costs (resulting from age-discrimination legislation), higher property-related costs, and depreciation relating to the proposed capital expenditure.

unit cost

In previous annual reviews we warned that our unit cost would rise when the number of mortgage endowment cases fell. This is partly because of differences in relative productivity and partly because fixed costs must be spread over a falling number of cases overall. We are now seeing the effect of this, as predicted.

Our unit cost for 2007/08 will rise significantly to £535, from a forecast of £477 (and a budget £472) in the current year. Our last three annual reviews have drawn attention to the fact that our unit cost had reached an unsustainably low level. But we do not see it returning to the level of more than £750 which it was in 2001 when the Financial Ombudsman Service was set up.

staff

For 2007/08 we have budgeted for a reduced headcount of 853.

  actual
2005/06
budget
2006/07
forecast
2006/07
budget
2007/08
casework divisions and ombudsmen 746 780 748 630
customer contact division 102 106 101 101
external liaison and publications 20 21 20 20
knowledge, information and policy 20 22 21 21
service quality 20 21 20 20
support services 58 65 61 61
total 966 1,015 971 853

As previously mentioned, we have stopped automatically replacing staff who leave, and we plan to have reduced our staff numbers to 853 by March 2008, as a result of natural turnover.

case fees for 2007/08

Firms covered by our compulsory jurisdiction currently pay no case fee for the first two cases against them that are resolved and closed each year. After that, firms pay a standard case fee of £360, or a special case fee of £475. The special case fee applies to a small minority of cases - mainly where the complaint is from a small business.

A large majority of the respondents to the discussion paper on the funding of our compulsory jurisdiction favoured removing the concept of a higher special case fee. Accordingly we propose to set the special case fee for 2007/08 at the same level as the standard case fee.

Businesses covered by our voluntary jurisdiction also currently pay no case fee for the first two cases closed each year. Similarly, businesses which will be covered by our new consumer credit jurisdiction from April 2007 will pay no case fee for the first two cases closed each year.

In all three jurisdictions, we propose to set the case fees in 2007/08 at £400 for all cases closed from 1 April 2007, and we will continue to charge the case fee only for the third and subsequent cases closed each year. We expect to resolve and close 106,500 cases and (after allowing for the two 'free' cases) to charge case fees totalling £37.9m. This would provide 66% of our gross income - compared with a forecast of 70% in 2006/07.

annual levy for 2007/08

The remainder of our expenditure - £19.4 m (£15.8m in 2006/07) - would be raised through the 2007/08 annual levy. This is an increase of £2.4 million for our existing jurisdictions, after allowing for the new levy for our new consumer credit jurisdiction.

compulsory jurisdiction levy

Based on our current funding model, the reduction in the number of case fees payable puts greater pressure on the annual levy. In addition, the costs related to the considerable work in handling non-chargeable mortgage endowment disputes involving time-bar issues will have to be recovered. However, it has been possible to allocate these costs to the industry fee blocks associated with mortgage endowments.

The FSA will consult separately on the levy payable by firms in the compulsory jurisdiction. The method of allocating the total levy amongst firms was consulted on in the FSA's consultation paper CP74. Broadly, it involves two stages:

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

Although the total levy has increased, the effect of this on firms in different fee blocks varies. That 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 only the minimum fee for their fee block.

Subject to consultation, typical levies in the compulsory jurisdiction are likely to be:

firm 2005/06
gross levy £
2006/07
net levy
£
2006/07
gross levy £
2007/08 estimate
£
bank or building society with 2 million relevant accounts 9,053 7,550 11,630 18,000
general insurer with £100 million of relevant gross premium income 8,100 5,200 5,500 6,500
life office with £200 million of relevant adjusted gross premium income 18,600 22,000 24,800 28,400
an investment adviser that holds client money and has 50 relevant approved persons 3,250 5,250 8,000 7,500
three-partner firm of independent financial advisers that does not hold client money 90 90 135 150
mortgage or insurance intermediary firm 50 50 50 50

The 2005/6 net levy represents the 2005/6 gross levy less refund of a £1.7 million surplus.

consumer credit jurisdiction levy

The levy payable by individual businesses which take out or renew licences during 2007/08 is set by the Office of Fair Trading.

voluntary jurisdiction levy

The 2007/08 rates of levy proposed for VJ participants are set out in annex D.

image of plan and budget 2007

For printed copies of this or any of our publications, email Aniko Rostagni in our communications team or phone her on 020 7964 0092.