FSA publishes Financial Risk Outlook

The Financial Services Authority (FSA) has published its Financial Risk Outlook (FRO) warning firms and consumers of the risks inherent in a significantly less benign economic environment.

Its 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.

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

"Firms and consumers need to recognise there are both short and long term risks and should think about the implications.

"Firms are clearly more aware of these risks now and should continue to consider how they would respond to a crystallisation of these risks particularly those relating to capital and liquidity."

The FRO informs the FSA's supervisory activities and is designed to promote greater understanding of the thinking behind the regulator’s actions.