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annual review 2010/2011

1 April 2010 to 31 March 2011

chairman's foreword

This is my last annual review. I will be stepping down from the board in January 2012, when my term of office comes to an end. It has been a privilege to serve as chairman of the Financial Ombudsman Service, especially during such a period of change and challenge in financial services.

As I look back over my recent chairman's forewords, a common feature is that I have had to comment on a marked discrepancy between what was expected at the outset of the period under review and what actually happened as that year progressed. This is evidently the case again this year.

So many different external factors can affect the volume and nature of the complaints referred to us that predicting our workload with any degree of certainty is near to impossible. The ombudsman service - like any demand-led organisation - has to make some assumptions in order to plan. But we also need to build in a degree of flexibility in order to deal with unforeseen events.

Consultation with our external stakeholders at the start of 2010 indicated a broad consensus that we were likely to see an overall rise of between 15% and 20% in the number of new cases coming to us in the financial year 2010/2011. There was, however, a great deal of uncertainty about how many complaints we would receive about payment protection insurance (PPI).

Based on this consensus, at the start of 2010/2011 we were geared up to receive around 190,000 new cases overall, significantly more than the record number of 163,000 we had received the previous year.

As predicted, we did indeed see an increase in the number of cases we received. With a record total of 206,121 new cases (26% more than last year), this increase was 8.5% higher than had been expected.

However, what no one had foreseen was that, by the end of the year, new PPI cases would account for 51% of the overall total. There had been a hope at the start of the year that PPI cases would level-off, following regulatory guidance on how businesses should handle these cases. In fact, PPI numbers more than doubled. This inevitably had a significant impact on our operations during the year, as we detail later in this annual review.

Overall during the year we settled and closed 164,899 cases - a very similar number to the previous year, but fewer than we had planned. This is attributable in large part to the situation with PPI complaints.

In October 2010, at a time when we were already receiving record numbers of these complaints (40% more than forecast), the British Bankers' Association (BBA) launched a legal challenge on behalf of a number of high-street banks.

This challenge, in the form of a judicial review, related to guidance published by the Financial Services Authority (FSA) on handling PPI complaints and to information on our own website about our approach to PPI cases.

Judgment was handed down by the High Court at the end of April 2011 - endorsing our approach, and that of the FSA, to handling PPI complaints. Just as this annual review was going to print, the BBA announced that it did not intend to appeal this judgment.

As we describe elsewhere in this annual review, this legal action against us has led not only to exceptionally high volumes of PPI complaints, but also to growing numbers of cases where the banks behind the challenge have decided not to co-operate fully with us.

This has made it impossible for us to progress these complaints as quickly as we would like. It has therefore led to a regrettable reduction in our service levels in these PPI cases, as well as to additional costs.

In other areas of our casework, life has continued as normal. It has been a key part of our strategy to ensure that the situation with PPI cases does not adversely affect other aspects of our operations. The success of this strategy is seen most clearly in the figures showing a marked improvement in the timeliness of our complaints handling for cases other than PPI.

I stressed in last year's annual review that we were committed to reducing the length of time that consumers and businesses have to wait in order to get their complaints resolved. Much hard work has gone into improving this key area of our customer service over the past twelve months and we are now resolving almost half of cases (other than those about PPI) within three months. There is, of course, still a long way to go before we reach the position we would like to be in. We are determined to improve our timeliness still further in the coming year.

In last year's annual review we noted the trend we were beginning to see, across all areas of our casework, for cases to be harder-fought and less capable of being resolved at an early stage. We thought this was likely to continue this year. We also expected an increase in the number of more complex cases. We were not, however, expecting so significant an overall change in the proportion of cases that can be resolved informally, compared to those that can only be resolved with an ombudsman's final decision.

What has happened is that the proportion of cases that involved an ombudsman's final decision has risen from 8% in 2008/2009 to 11% in 2010/2011 - with the actual number of ombudsman decisions increasing by 63% in the last year. There has been a significant shift towards cases that are more complex, as well as a marked acceleration in the tendency for both parties in a dispute to resist attempts at conciliation and to pursue matters through to the very end of our process.

This trend - together with the additional costs of dealing with exceptional volumes of PPI cases and the operational challenges and uncertainties arising out of the BBA's judicial review - has resulted in our facing increased case-handling costs. The unit cost for the year rose by 15% to £639. We have taken action to increase our efficiency, absorb inflationary pressures and cut our operating costs - and our budget unit-cost next year is below £600.

A consequence of these pressures has been that despite the cost-cutting measures we took, we were unable to break even during the year - and our financial reserves fell by £7 million. Because of the continued operational uncertainties on PPI-related matters, my board agreed in March 2011, following public consultation, that it was prudent to increase our reserves for 2011/2012 by £25 million - as a contingency against the costs involved in managing the growing volatility and unpredictability we face. This was subsequently approved by the FSA. There is more information about our budget and reserves in the feedback statement we published in March 2011.

We noted in our last annual review that we cannot assume the "operating model" that served us so well in our first decade will be best suited to our users' needs in the years ahead. Our experience during 2010/2011, as indeed throughout our first decade, indicates very clearly that, for the ombudsman service, uncertainty and volatility is the norm - not the exception.

So this past year has been a very important one in the continuing process to ensure our structure is fit for the future, to enable us to handle whatever may be in store for us.

Natalie Ceeney, our chief executive and chief ombudsman, had only very recently been appointed at the time of last year's annual review. Since then she has made very considerable headway in reviewing how we operate. This has included implementing a number of important initiatives and, as she outlines in her chief ombudsman's report, examining how we will need to adapt and develop to keep pace with our users' needs.

The regulatory structure around the Financial Ombudsman Service has also been subject to review during the year, with the government making reform of financial regulation one of its priorities. I am pleased that as part of that regulatory review, the government has confirmed its intention that the ombudsman service should remain independent, with a role clearly distinct from the regulator. We will, of course, continue to work closely with HM Treasury, the FSA and - in due course - the new regulators, on issues that might affect our work.

Towards the end of the year we made a number of changes to our non-executive board of directors. I am pleased to welcome Dame Janet Gaymer, Alan Jenkins and Pat Stafford. All three were appointed to the board with effect from February 2011. I am grateful to John Howard, who stood down from the board, for his contribution during his period of office.

The ombudsman service has always placed considerable importance on providing information, in a variety of different ways, about the complaints we see and the work we do. The past year has seen a greater increase than in any year so far in the amount of data we have made available.

We have, for example, doubled the information on our website about our general approach to resolving complaints. During the year we started publishing quarterly snapshots of our latest complaints data, in addition to the six-monthly complaints data about named financial businesses that we have been publishing since 2009.

Our directors' report, which will be published in the summer along with our audited financial statements, will also contain increased management and financial information.

The feedback we have received is encouraging and suggests that, far from overwhelming our stakeholders with information, we have created an appetite for more. So I am confident that this annual review contains much to interest our stakeholders. It offers more information about our work and its impact than in any previous year. It also records a year of exceptional challenge and important achievement.

Sir Christopher Kelly KCB
May 2011