Finance and resources
In 2019, we recorded a surplus of £338,000 (2018: £843,000) compared to a break even budget. Our reserves increased to £6.7 million, still significantly short of our target level.
Our finances remain under pressure, with a challenging period ahead of us, as set out in our 2020 Business Plan. The surplus against budget arose principally from litigation and investigation costs being lower than budget by £385,000.
Regulatory fee income increased by 4% year on year due to inflation and stronger than expected funds sector applications. Registry fee income was similar to 2018 as the number of registered entities was largely unchanged from previous years.
Total expenditure for the year was above budget, and 2018, predominantly due to increased staff numbers and professional services costs. Staff numbers increased as we resourced the new Financial Crime Examination Unit, whilst higher professional services costs were mostly related to the upgrade of the registry systems.
We continued to make significant investments in our information systems as we sought to modernise and improve digital capabilities both internally and for the benefit of external stakeholders. The net book value of fixed assets increased to £6.9 million by year-end (2018: £5.3 million) with annual depreciation and amortisation increasing to £1.4m (2018: £0.9m).
Regulatory income reached £18.9 million (2018: £18.2 million) following increases in both supervisory and registry fee income.
Supervisory fee income rose by £0.6 million compared with 2018. Registry fee income increased more moderately, taking into account that the number of annual returns processed in 2019 increased by only 1.4%. The total increase in registry income equated to 0.8%, given an increased ratio of online to paper submissions, with online submissions being at a reduced rate.
Total expenditure increased by 8% to £19.0 million (2018: £17.6 million).
Staff costs are the most significant item of expenditure with the average number of full-time employees increasing during 2019, giving rise to a year on year cost increase of 8% including inflation. The headcount increase was due principally to the creation of our new Financial Crime Examination Unit.
The continued trend of increasing computer systems costs, combined with depreciation and amortisation costs, is due to the investments in digital and automated processes. This necessitates the use of leading technology including state of the art cyber defences given the sensitive nature of the data we hold.
Professional services costs principally comprised IT technical specialists. This resource was primarily of a temporary nature and involved in the design and development of new registry systems to deliver the Island’s commitment to increased public access to registry data.
Investigation and litigation costs were below the historical average. A number of regulatory enforcement cases are in hand but did not necessitate significant third party costs during the year.
Financial position and forward look
Financial reserves improved during 2019 to £6.7 million (2018 £6.4 million). However, they remain materially below our target level of £10 million, being six month expenses and one year of average litigation costs.
Our overall financial position remains under pressure and we expect this to continue as set out in our 2020 Business Plan and our strategic roadmap.
The scope of our activities is ever-increasing and can involve, for example, enhancing our supervisory capabilities to tackle the ever-evolving threat of money laundering or taking on new regulatory roles, such as potential roles in relation to the resolution of financial institutions, the regulation of lenders and pension providers.
Whilst such potential new activities may be funded by additional income streams, they can attract significant upfront cost in advance of these additional income streams and where our supervisory capabilities have to be enhanced, this does involve significant increased costs.
Our costs structures are also changing as we make necessary and planned investments in capital intensive undertakings to enhance our registry systems and implement Industry portals. Both of these projects will bring substantial benefits to all stakeholders who interact digitally with us but initially require significant investment of time and funds.
As set out in our strategic roadmap, the fees needed to fund our 2020 programme of work are in place. However, we plan to consult more widely on the structure of our fees base and ensure that it is sustainable as it can be in the face of changing and competitive markets and that we have sufficient resilience to deliver on our mission and objectives in the medium term.