FSA Publishes 2008 Financial Risk Outlook Report

by Robin Pilgrim, LawAndTax-News.com, London

30 January 2008

The UK's Financial Services Authority (FSA) on Tuesday 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, explained that:

"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 will help 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.

Also this week, the Tripartite Authorities (comprising the Treasury, the FSA and the Bank of England), published a report entitled "Financial stability and depositor protection: strengthening the framework".

A consultation on proposals for strengthening the current framework for financial stability and protecting depositors was launched on Wednesday by the Chancellor of the Exchequer.

The consultation document sets out the Authorities' proposed action, both in the UK and internationally, to achieve five key objectives:

• Strengthening the stability of the financial system, both in the UK and globally;
• Reducing the likelihood of banks facing difficulties;
• Reducing the impact if, nevertheless, a bank gets into difficulties;
• Providing effective compensation arrangements in which consumers have confidence; and
• Strengthening the Bank of England, and ensuring effective coordinated actions by authorities, both in the UK and internationally.

Launching the consultation document, Chancellor Alistair Darling, stated that:

"Recent months have seen a period of sustained turbulence and instability in global financial markets, with financial firms across the world affected. A response to these episodes requires action, not only from the UK Authorities, but also from international firms and institutions."

"The Government is determined that its response is proportionate and appropriate and will therefore consult actively on these proposals, seeking discussions with financial institutions, consumer representatives and counterparts from across the world, to ensure that the final arrangements are effective and deliver the five objectives set out here."

"The Treasury Select Committee's report published on 26 January has informed the consultation document published today and I am grateful for its positive contribution."

The deadline for comments on the consultation paper is April 23.

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