Risks to Consumers
"Some consumers don't seem to be thinking ahead sufficiently prudently when deciding how much to borrow and how much to save. This could cost them dearly in the long run.
"Borrowing by consumers in the UK has been growing at an unsustainable rate, and some segments of the population are already having difficulty meeting their debt commitments. There is a risk that when a correction comes, it could be rapid and disorderly. The results could be lower overall economic growth, hardship for consumers, and increased credit risks for lenders.
"Over the longer term, people need to put a lot more aside if they are going to enjoy the standard of living in retirement they expect. But quick fix solutions using complex products promising high returns are likely to be more trouble than they are worth."
"Despite a now established low inflation environment, investment products and strategies designed to provide high nominal returns are continuing to appear partly to satisfy consumers' continued search for high nominal yields. These products require considerable financial skills just to understand what's going on with your money. Few consumers have these skills and we would urge consumers to make sure they fully understand the risks involved.
"There is a heightened risk for consumers taking on higher debts levels in a low inflation environment where the outlook for employment may also no longer be as secure. There is a risk that when a correction comes, it could be rapid or disorderly resulting in lower consumer spending and lower overall economic growth. This would increase credit risks for lenders as well."
Risks for Firms
Carol Sergeant said: "The last few years have not been easy ones for much of the financial services sector. Weak markets, lower growth, allegations of malpractice and a whole series of other operational and legal issues are presenting considerable managerial challenges for the firms we regulate.
"The most immediate impact has been on the life insurance sector as well as those firms reliant on asset management, stockbroking or the capital markets for their income where lower earning or losses have undermined capital strength. And the combined impact of trading losses and reduced fee revenues have had a detrimental effect on corporate and investment banking institutions compounded by allegations of malpractice mostly relating to business in the United States. The prospect of revenues remaining depressed during 2003 increases the risk of further losses across these sectors. The UK banking sector has coped well within this environment but the fortunes of many key players are tied to the recent strength of the retail market.
"These and other strains highlight the need for firms to assure themselves that they are capable of withstanding a combination of losses that could arise from the many different channels highlighted within the Outlook. The FSA is encouraging stress and scenario testing by firms to help develop sound strategies for dealing with the whole range of potential risks to their business, and an even greater emphasis on robust systems and controls."
Financial Risk Outlook 2003 also considers:
- developments in the markets and sectors it regulates, identifying risks to the FSA's objectives drawing upon its own data and intelligence, as well as published sources;
- important social and demographic trends, including an ageing population and inadequate financial planning by people for their retirement, sometimes known as the "savings gap";
- corporate governance and accounting practices in the wake of last year's failures and accounting scandals in the United States and elsewhere and the enhanced political and regulatory focus on this area;
- legal issues, including case law on the duty of care required by financial firms towards customers and market counterparts;
- international regulatory developments, where the changing regulatory environment - particularly forthcoming EU legislation - has implications for the way financial firms are regulated in the UK and the shape of the markets in which they operate; and
- available intelligence on financial crime, and the challenges to meeting our objective to reduce it.
"The FSA's programme of work to be published next week will explain how the FSA will continue to address the major issues that fall within its remit. Many issues are long-term in nature and require co-operation with others. But each consumer and each regulated firm has the opportunity and responsibility to review their own particular circumstances on a continuous basis."
Background:
- Financial Risk Outlook 2003 is available on the FSA website www.fsa.gov.uk . The Financial Risk Outlook 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. 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 Plan and Budget 2003/04 due to be published on Monday 27 January 2003.
- This is the second Financial Risk Outlook published by the FSA. The Outlook is published at the beginning of each year setting out the background against which the FSA sets its priorities.
- An FSA leaflet You and your money - taking control will be available from Post Offices from today. It provides a step by step easy to follow guide for consumers on how to manage their finances and sort out debt. For more details see FSA Press Notice FSA/PN/010/2003 published on 22 January.
- 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.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
