UK’s Financial Services Authority Publishes Its Financial Risk Outlook

The FSA has today published its Financial Risk Outlook 2005 , which details the risks that it sees facing the financial sector and its customers. The Outlook sets out the background against which the FSA sets its priorities for the year, which will be detailed in the Authority's Business Plan to be published next week.

The Financial Risk Outlook highlights a number of priority risks including the need for people to take greater individual responsibility for long-term financial provision, the popularity of some consumer products that are very complex, and the need for rigorous risk management by firms of complex and relatively illiquid instruments. The Outlook also considers three variations on a central scenario of sound domestic and global economic performance in the year ahead.

FSA Chairman Callum McCarthy said: "Over the last year, UK firms and consumers have benefited from a relatively benign economic environment. Over the next year, most commentators expect this to continue, with a slowdown in the property market, more moderate growth in household consumption, relatively low interest rates and growth in business investment. We take this as the central scenario case against which the FSA is planning.

"Despite this central case, there are important long and short term risks which firms and their customers need to address. People are having to take increased responsibility for their pensions and other long-term financial arrangements. The products designed to meet these needs are sometimes difficult to understand and explain. They are being sold by an industry undergoing significant structural change. The financial industry, too, is dealing with more complex instruments that produce operational, credit and liquidity risks.

"The Outlook illustrates the high degree of uncertainty around the generally positive economic outlook. It is important that firms allow for these uncertainties in their plans and that the current environment does not lead to complacency."

Amongst the other priority risks identified in the Financial Risk Outlook 2005 are:

changes in the distribution of retail financial services and the introduction of basic advice for the sale of stakeholder products. There is a risk that the benefits arising from greater competition and accessibility to advice could be impeded if compliance standards are allowed to slip;
the need for firms to manage financial and operational risks carefully to keep up with the pace of financial innovation;
at a time of low yields and in the current benign economic environment, the danger that firms may relax controls or may enter into excessively speculative investments; and
threats to business continuity, including terrorist threats.

The level of forthcoming regulatory initiatives from international sources is such that the FSA has also produced its first International Regulatory Outlook . This details the array of international regulatory initiatives that will affect UK firms and consumers.

Callum McCarthy said: "This is the first time that we have produced an International Regulatory Outlook. It is an indication of the scale of international work that impacts upon the FSA and UK firms. Much of what the FSA has to do in the coming year is driven by this programme. Bringing it together in this way is designed to help those who provide and distribute financial services plan for the future and be ready for changes in the pipeline."

Next week the FSA will publish its annual Business Plan and Budget. This will detail how the FSA will address its priorities of promoting efficient, orderly and fair markets, helping retail consumers achieve a fair deal, and improving its business capability and effectiveness. The risks detailed in the Financial Risk Outlook 2005 will inform its work towards those priorities.

Background

The Financial Risk Outlook 2005 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 Business Plan 2005/06 due to be published on 26 January 2005.
The International Regulatory Outlook offers extensive analysis of the regulatory change being driven by international initiatives, including European Union legislation. It is intended to help stakeholders plan for forthcoming regulatory change.
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.