29 January 2008

FSA Financial Risk Outlook

The FSA published its financial risk outlook (FRO) warning firms and consumers of the risks inherent in a significantly less benign economic environment. Financial markets could be more vulnerable to external shocks and the impact of shocks on firms could be bigger than it was in previous years, the report states.

The restricted availability of certain funding sources could force some lenders to shrink their mortgage businesses, which would have direct consequences for the real economy and consumers, the report continues.

As lower supply of secured credit and tighter lending standards for mortgages are likely to add further pressure on already highly-indebted consumers, the FSA expects to see a growing number of consumers experiencing debt-repayment problems in 2008.

“To be clear, these are not firm predictions about what we think will actually happen”, Callum McCarthy, the Chairman of the FSA, said. “But are a prudent attempt to highlight the risks that could impact consumers and firms in a less benign economy.“

The reports central scenario identifies the following five priority risks:

- Existing business models of some financial institutions are under strain as a result of adverse market conditions;

- Increased financial pressures may lead to financial firms shifting their efforts away from focusing on conduct of business requirements and from maintaining and strengthening business-as-usual processes;

- Market participants and consumers may lose confidence in financial institutions and in the authorities’ ability to safeguard the financial system;

A significant minority of consumers could experience financial problems because of their high levels of borrowing;

- Tighter economic conditions could increase the incidence or discovery of some types of financial crime or lead to firms’ resources being diverted away from tackling financial crime.

- The FRO focuses on the risks arising from the events of the second half of 2007 and the less benign economic outlook expected over the next 18 months.

The Outlook's conclusions are a key element in the FSA's priority-setting arrangements which will be set out in its Business Plan due to be published on 5 February 2008.

Press release

Financial Risk Outlook

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