Firms' refusal to pay their case fees to the FOS until the outcome of a judicial review into PPI mis-selling could exhaust the Ombudsman's reserves in six weeks and force it to raise its industry levy by as much as 25%.
FOS says it expects the number of cases for the year to March 2011 to be 7% higher than last year, but within this total figure, PPI cases have risen by almost 40%.
However some firms are refusing to co-operate with the FOS until the outcome of a judicial review into PPI misselling by the British Bankers Association (BBA).
FOS says such a revolt would send its income plummeting, and could derail the organisation's whole operation.
Loss of income from case fees in just one month could lead to an operating monthly deficit of up to £4m for the FOS, which would exhaust its reserves within six weeks, it says.
For the current financial year and in 2011/2012 this could involve an amount totalling between £10m and £30m, well in excess of its reserves.
The FOS board believes to reflect these uncertainties it needs to plan on the basis of a significantly higher level of reserves for the compulsory jurisdiction.
Its analysis currently suggests an increase in the level of reserves of up to 20% or 25% of its annual expenditure, with a corresponding increase in the compulsory jurisdiction levy.
The FOS says it will need to make a final decision on the level of our reserves in March 2011.
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