This year’s Financial Risk Outlook is focused on the risks arising from the events of the second half of 2007 and the less benign economic outlook that we expect over the next 18 months. The tighter financial conditions have led to the emergence of new risks and also highlighted some aspects of Priority Risks covered in the previous editions of the Financial Risk Outlook.

Consensus forecasts, on which our Central economic scenario is based, indicate a less benign economic outlook for the UK and global economies than we have experienced in recent years. The risks to this central case have increased considerably in the year since we published the previous edition of the Financial Risk Outlook, and the distribution of these risks is weighted heavily to the downside.

Financial market conditions deteriorated considerably in 2007 as investors reassessed risks in their portfolios and risk premia began to rise. As a result, financial markets could be more vulnerable to external shocks and the impact of shocks on firms could be bigger than it was in previous years. The operating environment for firms remains difficult and it is likely that these conditions will persist, particularly if investor confidence in some markets and financial institutions remains low.

The recent tightening in financial conditions may have exposed some firms’ business models as being potentially unsuitable in more stressed financial conditions where, for example, access to liquidity is restricted. This has put pressure on measures of prudential risk for some firms, such as capital and liquidity.

The restricted availability of certain funding sources could force some lenders to shrink their mortgage businesses, which would have direct consequences for the real economy and consumers. The lower supply of secured credit and tighter lending standards for mortgages are likely to add further pressure on already highly-indebted consumers. We therefore expect to see a growing number of consumers experiencing debt-repayment problems in 2008.

Despite the more difficult economic and financial conditions, firms must not divert attention away from focusing on conduct-of-business requirements and our high-level principles. In particular, firms will need to ensure they treat customers fairly, continue to tackle market abuse and other areas of financial crime, and address other conduct-ofbusiness requirements.

We will continue to focus on other longerterm risks not discussed at length in this document. These include longevity, the future for the retail distribution of financial products, conduct-of-business issues, and climate change, which remain important to us and should also remain important to firms.

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-ofbusiness
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.

Download Financial Risk Outlook 2008

PDF format, 1.08MB, 70Pages.

© Financial Services Authority 2008
25 The North Colonnade Canary Wharf London E14 5HS
Telephone: +44 (0)20 7066 1000 Fax: +44 (0)20 7066 1099
Website: www.fsa.gov.uk
Photographs © James Winspear 2008

The Financial Services Authority (FSA) is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. We are a company limited by guarantee and financed by the financial services industry. 

The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 9 non-executive directors (including a lead non-executive member, the Deputy Chairman). This Board sets our overall policy, but day-to-day decisions and management of the staff are the responsibility of the Executive.

Contents:

Foreword 1
Executive summary 2
Section A Economic and financial conditions 5
Central economic scenario 5
Global financial market conditions 9
Alternative scenarios 13

Section B Priority Risks 19

• 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

Section C Industry focus 39

Banks and building societies 39
Retail intermediaries 46
Asset management 49
Capital markets and financial exchanges 52
Life insurance 55
General insurance 58
Index of charts, tables and figures 62
Glossary 63

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