chief operating officer's review of operations

The year ended 31 March 2001 was the first operational year for the new Financial Ombudsman Service. Work during the year involved putting in place new policies, processes and systems – while at the same time responding to a marked increase in activity.

In May 2000, the board of the Financial Services Authority (FSA) approved our budget for the year ended 31 March 2001 of £22.7 million. The assumptions underlying the budget included:

	a forecast of 27,500 new cases during the year;
	a forecast of 27,000 cases closed during the year (resulting in a unit cost of £788); and
	a heavy development programme, including the launch of a new casework system.

We achieved the development programme while at the same time dealing with a significantly higher workload.

measuring our cost effectiveness
We received 31,300 new cases during the year ended 31 March 2001 – compared with our original forecast of 27,500 new cases. In the previous year (ended 31 March 2000) the separate complaints-handling schemes – now operating jointly as the Financial Ombudsman Service – had received a total of around 25,000 cases. New cases involving mortgage endowment complaints have had a particular impact on these figures.

In the year ended 31 March 2001, we closed 28,400 cases (compared with a budgeted figure of 27,000). Our productivity rates matched the levels previously achieved at the separate schemes – which was especially pleasing, given the disruption of the merger and the co-location of the schemes to form the new single ombudsman service.

productivity year ended 31 March 2001
	actual	budget
new cases	31,350	27,500
cases closed	28,400	27,000
operating costs*	£21.4 million	£21.3 million
unit cost	£753	£788
* Operating costs are defined for this purpose as costs before interest. For the purpose of calculating the unit cost, we have also assumed in the actual figures the original budgeted depreciation figure of £1.5 million. This avoids showing any “windfall gain” purely from a change in depreciation policy.

We assess the cost effectiveness of our service by progress against certain key measures. The most widely understood is “unit cost”, which is defined as total costs (before interest) divided by the number of cases closed. Our actual unit cost for the year ended March 2001 was £753, compared with a budgeted unit cost figure of £788. This resulted from our closing 1,400 more cases for the same budgeted cost. As noted below, our measures of cost effectiveness will need to be refined in the current year.

measuring our timeliness and quality
Cost effectiveness – or value for money – is only one measure of performance. We also need to develop measures for timeliness and quality.

As at 31 March 2001, 84% of our caseload was less than six months old; 12% was between six and twelve months old; and 4% was more than twelve months old. These figures are not strictly comparable across the different divisions of the ombudsman service due to the varying ways in which the separate schemes used to record data. However, the introduction of our new casework system will harmonise these figures in future reports.

For the future we will also need to assess what users – both consumers and firms – value in our service. We are therefore carrying out customer surveys to gauge potential service standards. We intend to consult on these measures in our budget consultation paper for the year ended March 2003.

costs and income
Our operating costs for the year ended 31 March 2001 were £20.6 million, compared with a budget of £22.7 million. This represents a variance of £2.1 million below budget – although £1.4 million of this variance is due to a change in the depreciation policy originally assumed.

Staff and other costs were in total £0.1 million above our original budget – after absorbing approximately £0.5 million additional salary and other costs arising from the increase in mortgage endowment complaints.

operating costs year ended 31 March 2001
	actual £ million	budget £ million
staff costs	14.0	14.1
other costs*	5.9	5.7
interest	0.6	1.4
depriciation	0.1	1.5
total costs	20.6	22.7
* Other costs include premises and office costs

We had originally budgeted for income of £20.6 million, but this rose to £21.1 million – partly due to the additional service charges in relation to staff recruited to handle mortgage endowment complaints. This resulted in a surplus for the year of £0.5 million, which has been transferred to reserves.

building skills and resources
In parallel with servicing the complaints-handling operations of the existing schemes, we have been preparing to launch the new unified ombudsman service at “N2” – the date when the Financial Services and Markets Act 2000 comes into force and we acquire our own full legal powers. During the year ended 31 March 2001, we dedicated significant time and resources to building the infrastructure for the new service. Although we have implemented numerous initiatives, the key developments have been in systems and training.

One of the major tasks we set out in our budget and plan for the year ended 31 March 2001 was the need to develop a new unified casework system. When we merged the separate complaints-handling schemes in April 2000, we inherited four different case-handling systems, none of which could provide a platform for future growth. As soon as the schemes came together under one roof in April 2000, we therefore launched a project to rationalise the “business process” and to build a supporting system.

In April 2001, we launched the first core part of our new casework system, which will be complete by the end of June 2001. We will follow this with the introduction of scanning and document management, together with a home-working module, in the second half of the year ended 31 March 2002.

Underlying the development of the new casework system, we have taken the opportunity to re-think our “business process”. A key principle of the new process is to ensure that disputes are dealt with at the earliest possible stage and in a fair and cost effective manner. In order to achieve this, our customer contact division – which handles the initial contact with the consumer and the firm – will develop more proactive “screening” measures. When cases subsequently progress to our casework divisions, we will attempt to mediate an agreed settlement before undertaking a full investigation. Our new computerised casework system is tailored to support this process.

One impact of this change is that an increasing proportion of complaints will be dealt with in our customer contact division. Our traditional measure of unit cost will then not be a fair measure of the efficiency of the scheme and we will need to refine our measures of cost effectiveness.

Training has been another key theme during the past year. The move to a unified organisation with new systems and new ways of working has created a huge challenge for all staff. In the year ended 31 March 2001 we carried out over 2,000 days of training, covering technology, performance management and appraisal skills, as well as ensuring the continuing professional development of our staff.

In addition to the time and resources spent developing new systems and training, we have focused on the harmonisation of policy and practices and the development of proposed methods of funding.

This work has been carried out against a background of increasing volumes of new cases. Our key priority has therefore been to manage change, while at the same time maintaining appropriate standards of service across the organisation.

Ian Marshall
chief operating officer