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Plan & Budget 2001 / 02 for the year ending 31 March 2002 - chapter six

"budgeting to bring the unit cost below that of the 'old' schemes in 2001/02 rather than in 2002/03"

Introduction

1 In the budget presented in March 2000 to the boards of the FSA and Financial Ombudsman Service, we set out broad three-year objectives. We characterised 2000/01 as a start up year, 2001/02 as a transitional year and 2002/03 as a the 'pay-back' year, when we would see genuine returns in terms of service standards to the customer and industry and in cost effectiveness.

2 Taking the first two years as a whole, our aim has been to stabilise the 'old' schemes following relocation; to invest in crucial skills and resources; and to provide a platform to bring our unit costs to the same level as the existing schemes by 2002/03 - and below that level after 2003. In practice, the new service is on course to achieve these objectives, but is budgeting to bring the unit cost below that of the existing schemes in 2001/02 rather than in 2002/03.

 

Outturn for 2000/01

3 Before turning to the budget year 2001/02, the position for 2000/01 can be briefly summarised. In March 2000 we agreed a budget of £22.7m with the existing scheme boards and the FSA . Since that date, both initial enquiries and actual complaints have been well in excess of original budgeted numbers, principally due to the impact of endowment mortgage complaints. The position is summarised as follows.

 
Original
budget
Latest
estimate
Initial customer contacts
260,000
300,000
New cases
27,500
31,700

 

4 To cope with the additional demand, the board of the PIA Ombudsman Bureau agreed to the recruitment of an additional 33 people in the investment division. We have also initiated a joint project with PriceWaterhouseCoopers (PWC) to develop a cost effective and efficient approach to dealing with endowment mortgage complaints. The estimated cost of this project will be about £400,000.

5 Despite the additional workload and incremental costs of around £0.6m, we are targeting to keep total costs for 2000/01 (before the PWC project) to £22.5m, compared with our budget of £22.7m. We are able to do this because the full year effect of the recruitment will not be felt until 2001/02. We are also aiming to match additional costs in 2000/01 by cost savings. However, the full year impact of these costs will be felt in the budget year 2001/02.

6 If we take into account the joint project with PWC, total costs for 2000/01 will be £22.9m, which is £0.2m above the budget of £22.7m. However, this figure is after incurring additional costs of £1m, for which we have received incremental service charges from the PIA Ombudsman Bureau.

7 The budget for 2001/02 is £27.6m, which represents an increase in costs of just over 20% compared with 2000/01. This increase should be set in context against a budgeted 40% increase in the number of closed cases and a projected fall in the unit cost from £764 in 2000/01 to £688 in 2001/02 (a fall of £76 in money terms). It also represents a decrease of £42 on the aggregate unit cost of £730 at the former schemes. The improvement in unit cost is a direct result of spreading a larger number of cases over the infrastructure and is also due to improved productivity (as explained in chapter 3).

8 A summary of the budget for 2001/02 is as follows.

Estimate
2000/01
£m
Budget
2001/02
£m
Staff costs
Investment division
5.3
6.9
Banking and loans division
2.5
2.7
Insurance division
2.2
2.4
Customer contact division
2.0
2.5
Publications/information/external liaison
0.4
0.6
Legal casework support
0.4
0.5
Company secretary and library
0.2
0.2
Board and management
0.6
0.6
Support divisions
1.5
1.7
Other staff costs
0.9
1.0
16.0
19.1
Non-staff costs
Professional costs
0.5
0.5
IT costs
0.6
0.7
Premises and facilities
2.5
3.4
Other costs
0.3
0.7
Depreciation
1.5
2.1
5.4
7.4
Operating costs
21.4
26.5
Financing costs
1.1
1.1
Total costs
22.5
27.6
Special project costs
0.4
Total costs after special item
22.9
27.6
Case closures
28,000
38,500
Unit cost*
764
688

*Unit cost is defined as costs before financing and special items, divided by case closures

9 The main reasons for the increase in costs in 2001/02 are as follows.

a) Full year impact of staff recruited during 2000/01 The full year impact of additional staff agreed by the PIA Ombudsman Bureau, recruited primarily to handle the increase in complaints about endowment mortgages, is £1.1m.

b) New budgeted recruitment We are budgeting to recruit an additional 39 people, as outlined in paragraph 11 below. The cost of this is £1.4m.

c) Salary award The cost of the budgeted pay award is £0.6m.

d) Premises and facilities The full year rental impact of our premises at South Quay (£0.5m) and a proposed additional floor also in South Quay (£0.4m).

e) Other costs Including £0.3m relating to the introduction of electronic scanning.

f) Depreciation There is a full year depreciation impact of £0.6m.

10 Staff numbers are forecast to increase as follows.

 
2000/01
budget
Dec 2000
actual
31 March 2002
budget
Customer contact/enquiries
77
77
90
External liaison/communications
15
14
15
Investment casework
126
154
179
Insurance casework
56
56
61
Banking and loans casework
71
57
65
Legal casework support
9
9
10
Company secretary/library
5
5
5
Finance/IT/HR/Facilities
36
39
41
Management
3
3
4
 
398*
414
470

*431, if adjusted for the additional recruitment agreed by the PIA Ombudsman Bureau

11 The principal reason for the increase from a budgeted headcount of 398 in 2000/01 to 470 in 2001/02 is the increase in staff in the investment division and the customer contact division, needed to handle the higher workload. An analysis is as follows.

 
Number
PIA Ombudsman Bureau additional recruitment in 2000/01
33
PIA Ombudsman Bureau additional recruitment in 2001/02
20
Customer Contact division 13 Others (including support areas)
6
 
72

The increase in staff is therefore a direct response to the influx of endowment mortgage complaints. The increase in PIA Ombudsman Bureau staff is agreed and funded by the PIA Ombudsman Bureau. The increase of staff in the support functions relates to work which we had originally planned to outsource.

Premises

12 Our existing premises at South Quay, East London, were originally planned to accommodate 400 people. By removing conference and meeting rooms, we are managing to fit in 30 to 40 more people. This will mean that we run out of space by April 2001. This is before any growth arising from additional publicity at 'N2' or the introduction of the 'voluntary' jurisdiction.

13 The long-term accommodation solution is to introduce low cost off-site working (eg home-working and case-handler satellite units). However, to give us time to cope with the immediate increase in numbers, and also to allow us to build home-working into the new system, we are planning to take on an additional floor in the South Quay area. Our overall accommodation strategy is subsequently to cap any further central London accommodation and to use off-site working for any possible further expansion.

14 We still need to be prepared to cut costs in the event of a decrease in workload, say in 2002/03. Our intention is therefore to agree a lease with an early break period.

15 The annual costs of an additional floor with space for 80 people would be in the region of £350,00 to £400,000 per annum. This is built into the current budget.

16 The FSA have guaranteed the Financial Ombudsman Service a facility of £25m but require us to consult further with them before borrowing in excess of £21m. Our cash flow estimate is as follows.

 
1999/00
£m
2000/01
£m
2001/02
£m
Total costs before depreciation
21.4
25.5
Capital expenditure
3.1
8.1
1.7
Establishment cost
2.9
2.1
Movement in debtors
1.9
(1.9)
Cash outflow
6.0
33.5
25.3
 
Income from schemes
0
21.0
27.6
Net cash flow
(6.0)
(12.5)
2.3
Opening bank balance
0
(6.0)
(18.5)
Closing bank balance
(6.0)
(18.5)
(16.2)

17 The budget for capital expenditure in 2001/02 includes £0.5m for the fit-out of the additional floor, £0.6m for the development of home-working and £0.6m for IT upgrades.

Sensitivity

18 As we indicated in chapter 4 of this document, the forecasting of complaints is an uncertain business. We need to be prepared for volumes of complaints to be materially above or below this draft budget. In the case of higher levels, we may need to request additional resources from the relevant scheme board. In such a case, we would undertake to translate the additional workload into a unit cost below the budgeted £688.

19 If the required workload is lower than budgeted, we will undertake to reduce the cost base so that the unit cost remains no higher than the agreed target of £688. Clearly if this is predicted to happen mid-way through a financial year, we would need some time to achieve these savings.

Summary

20 In summary, the budget shows an increase in costs of 20%, which is principally driven by increased workload. The increase should be set in context against a projected 40% increase in resolved cases and a fall in the unit cost from £764 to £688.