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

executive summary - "a budgeted 40% growth in case closures and a projected fall in unit cost"

1 Purpose of consultation The object of this paper is to consult on the costs and funding of the Financial Ombudsman Service for the year to 31 March 2002. As outlined in consultation paper 74 (Funding the Financial Ombudsman Service), the costs for 2001/02 will be recovered under the powers and mechanisms of the existing ombudsman schemes. Responses to this paper are therefore invited in relation to our budget for 2001/02 and the method used for allocating the costs of that budget. Responses to CP74, in relation to the method of funding the service after 'N2'(the date when we receive our legal powers), should be returned separately to the FSA by 28 February 2001.

2 Progress to date and business plans The new single ombudsman service has employed the ombudsman schemes' staff since 1 April 2000 and has successfully c0-located to South Quay Plaza in East London. Despite the disruption and higher than forecast level of new complaints, productivity has remained at the level achieved by the former schemes. Preparation is underway for when the new service takes on full responsibility at 'N2' (Chapter 3).

3 Growth in complaints There has been a 30% growth in complaints to the ombudsman service. Despite research, growth in complaints is unpredictable and dependent on issues of the moment. In the current year, complaints relating to Tessas and endowment mortgages have had a large impact (Chapter 4).

4 Cost effective service Unit cost* is estimated to rise from £730 in 1999/00 (average unit cost across the former schemes) to £764 in 2000/01, and then fall to £688 in 2001/02. The short-term increase in the current year has been due to deliberate investment in resources and skills. The projected fall next year is due to the benefits of scale and increased productivity, in particular a projected 40% increase in closures (Chapter 5).

5 2000/01 Estimate The Financial Ombudsman Service is targeting its 2000/01 costs to be below the agreed budget of £22.7m, despite absorbing £0.6m extra costs of agreed additional recruitment. We are also initiating a joint project with Price Waterhouse Coopers to develop a cost effective approach to handling endowment complaints. The cost of this project will be £0.4m and will be separately funded by the PIA Ombudsman Bureau.

6 2001/02 Budget The budget for 2001/02 is £27.6m, which is a 20% growth on 2000/01. This is against the context of a budgeted 40% growth in case closures and projected lower unit cost (Chapter 6).

7 Sensitivity analysis and framework for control If workload volumes are higher than budget and additional resources are required, we task ourselves to translate this into a unit cost lower than £688. Conversely, if workload is lower than budget, we undertake to make savings to maintain the target unit cost (Chapter 6).

*total costs before interest, divided by estimated number of case closures