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plan & budget 2004/05 for the year ending 31 March 2005 - tariff and case fee information

7.1 funding 2004/05

Our funding requirement in 2004/05 will be £45.0m, £30.5m of which we will raise from case fees and the remaining £14.5m through the annual levy.

7.2 surplus

We propose to refund part of the surplus of £4.0m that had accumulated in the period to March 2003. In line with the policy agreed with the FSA, we propose to return to participating firms any surplus in excess of 5% of the annual expenditure. The funding requirement to be raised by the annual levy will therefore be reduced by £2.0m to £12.5m.

income analysis
budget 2003/04 £m
forecast 2003/04 £m
budget 2004/05 £m
case fees

7.3 levy/case fee split

Feedback from last year’s consultation indicated that firms would prefer us to raise a greater proportion of our income from case fees rather than from the levy. We therefore proposed a budget split - the ratio of income from case fees in relation to income from levy - of 64:36. The forecast outcome for 2003/04 is now for a 69:31 split and, before deducting any credit from the projected surplus, the proposals below for 2004/05 would leave this ratio largely unchanged. This outcome is in line with our aim of ensuring that the split broadly allows us to recover our case-handling costs through case fees, and our overhead costs through the levy.

7.4 case fees

On this basis, we are proposing that the case fee should remain unchanged at £360, and that we will not charge firms for the first two of their cases that we deal with (as long as their annual levy has been invoiced and paid). We estimate that the additional sum we would need to collect from the levy as a result of this measure is £1.2m. The “special” case fee (mainly relating to complaints about small businesses and complaints about firms that have resigned from the Financial Ombudsman Service) will be reduced by £50 from £600 to £550.

The advantages of our leaving the level of the case fee unchanged are that:

  • There is no need for discussion with firms about the year in which the case should have been closed, and the level at which the charge should be set.
  • If complaint levels fall, there is less risk of our having to increase the case fee in 2004/05, which would result in a perceived price “increase”.
  • Firms do not generally complain about the actual amount of the case fee - only that they have to pay, whatever the outcome.
  • Although firms of independent financial advisers (IFAs) have more concerns about the impact of case fees than larger firms do, a recent survey showed that fewer than a quarter of IFAs saw the case fee as a significant business problem, while half said it was not a problem at all. (Source: Money Marketing, 11 December 2003).
  • Reducing the case fee would mean raising a greater proportion of the funding by the annual levy, which is neither the expressed preference of most firms, nor in line with our policy objective.
  • An analysis of the case fees charged in our first full year of operation (2002/03) showed that fees were charged to only 1,500 of the approximately 8,000 firms then covered by our compulsory jurisdiction - while all 8,000 firms paid a general levy contribution. Of the firms that were charged case fees, nearly half had only one or two complaints during the year that resulted in a case fee. It appears that among the 8,000 firms covered by the ombudsman service, some 750 are of a size that means they regularly produce three or more complaints a year. We have termed these 750 or so firms "regular users", while the remainder of firms are "occasional users". For "regular users", being covered by the ombudsman service and paying a significant number of case fees are facts of business life, for which the firms can make appropriate business plans. However, "occasional users" may go from year to year without having any complaints about them referred to the ombudsman service.

The advantages of our not charging for the first two cases are:

  • Potentially, all participating firms would receive a benefit. "Regular user" firms would not be charged for the first two cases, while "occasional users" would have the reassurance that the unlikely occurrence of one, or even two, complaints against them in a year would not impact disproportionately on them.
  • It should reduce the sense of unfairness that has been felt in the past by some firms who have chosen to settle cases with the consumer, even where they have felt there was no justification, simply in order to avoid a case fee.

7.5 The levy funding requirement for 2004/05 will be £14.5m, an increase of 22% over 2003/04 (10% of this increase relates to the cost of offering firms two “free” cases). We propose to use £2.0m of the surplus from previous years to lower the budget proposals for the levy funding requirement by reducing the tariff rates uniformly over all the industry blocks. This would then give an overall increase of 5% in the tariff rates.

7.6 annual levy

The FSA is consulting in CP208 on plans to change the way in which the general levy is invoiced and collected. It is proposed that the FSA should assume responsibility for this invoicing and collection. This change would necessitate changes to DISP 5. The proposed amendments are set out in Annex 5 in CP208. These amendments will be determined by the FSA and approved by the Financial Ombudsman Service. The revised invoicing and collection arrangements will not apply to the voluntary jurisdiction or to case fees.

As a result of the proposed amendments to DISP 5, it has been necessary to make some consequential amendments to DISP 4.

These are set out in appendix D of this plan & budget. DISP 4 sets out the standard terms of the voluntary jurisdiction of the Financial Ombudsman Service. The Financial Ombudsman Service is empowered by schedule 17, paragraph 18(3), to make the rules regarding payments by firms that participate in the voluntary jurisdiction of the Financial Ombudsman Service. The FSA is required to approve these rules.

7.7 overall impact on firms

The proposals for the levy (reproduced in appendix A), on which the FSA is presently consulting in CP208, would have the following impact on firms, assuming constant business year-on-year. The methodology for allocating expenditure to blocks, consulted on in CP74, is based on the number of case-handling staff required to handle the complaints expected in that block. The increase in the tariff rates for advisory firms therefore reflects the increase in the workload relating to mortgage endowment complaints, compared with the workload assumed in the budget for 2003/04.

  • A bank or building society with 2 million accounts would pay a levy of £13,800 in 2004/05, compared with £25,000 in 2003/04.
  • A general insurer with £100 million of relevant premium income would pay a levy of £8,100 in 2004/05, compared with £11,600 in 2003/04.
  • A life office with £200 million of relevant premium income would pay a levy of £18,600 in 2004/05, compared with £18,400 in 2003/04.
  • An adviser who holds client money with 50 approved persons would pay a levy of £3,250 in 2004/05, compared with £1,750 in 2003/04.
  • A three-partner firm of IFAs (independent financial advisers) not holding client money would pay a levy of £90 in 2004/05, compared with £75 in 2003/04.

7.8 unit cost

We expect the unit cost to fall to £489 in 2003/04 - £52 below budget - because of the increased volume of cases. However, this cost will rise to £507 in 2004/05, because of the full-year impact of the additional casework staff recruited in 2003/04, together with additional accommodation costs.

7.9 mortgage and insurance intermediary firms

We remain uncertain about the volume of complaints that we will receive in 2004/05 involving mortgage and insurance intermediaries. The fact that we do not know how many of these firms will join our voluntary jurisdiction, before they are required to join our compulsory jurisdiction later in the year, makes this particularly difficult to estimate. We have therefore concluded that it is not sensible to calculate a levy for these firms this year. Instead, we propose to charge them the full case fee of £550 for each case closed in 2004/05. This proposal will be included in the consultation mentioned at paragraph 3.3. However, we also propose that, as for other firms, the case fee should apply only to the third and any subsequent complaints about them that are closed during a year.