FSA - UK Regulator Warns of Breakdown of Business Models of Some Financial Institutions

By: Submissions

The Financial Services Authority (FSA) today 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 helps to promote greater understanding of the thinking behind these actions. The FSA's Business Plan for 2008, which will be published next month, sets out the FSA's priorities for the year ahead.

The FRO sets out some key messages to help firms consider how to respond to both the priority and any sector specific risks. The paper also highlights the need for consumers to understand how possible changes connected with the priority risks could affect their finances and spending.

1. The Financial Risk Outlook 2008 [PDF] highlights significant developments in the environment within which the FSA operates. It aims to draw out the links between these developments and the risks to the FSA's statutory objectives. This analysis is then used to help shape the FSA's strategy for the coming year.
2. By publishing this document, the FSA seeks to raise awareness of the key issues facing it and the regulated industry and to place the actions and decisions the FSA makes in context. 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 February 5th 2008.
3. Consumers can find helpful information on financial products and services on the FSA's consumer website .
4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.

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