The FSA has published the Financial Risk Outlook 2010 (FRO). In the FRO the FSA outlines the main risks and issues present in its operating environment, affecting firms, markets and consumers.

The FRO is divided into the following sections:

  • Section A sets out the macro-economic background and outlook. It considers the challenges created by the need for some households and companies (particularly in commercial real estate) to deleverage from high pre-crisis levels of indebtedness. It describes the base case assumption of a gradual low inflation recovery, but also possible alternative scenarios which would pose different challenges for specific consumer segments and firms.
  • Section B considers the implications of this outlook for financial stability and prudential risks and issues. The FSA notes that in the banking sector its interim capital regime has already driven a major increase in capital ratios to above pre-crisis levels, but that banks and building societies will need to build up capital further to meet future global requirements. The FSA also sets out in this section the new macro-economic parameters that it will be requiring firms to use in capital stress tests during 2010.
  • Section C sets out challenges around market risks and issues. The FSA notes that many of the risks that it is concerned with, and which market participants and infrastructure providers need to manage, are either ongoing (such as, the issue of market abuse) or reflect developments which are independent of the macro-economic cycle (such as the fragmentation of equity market liquidity through the development of new trading platforms, high frequency trading and over-the-counter markets).
  • Section D addresses retail conduct of business issues. Some of the risks that the FSA and the industry need to watch carefully are accentuated by the current specific economic circumstances. However, other risks that the FSA discusses are rooted in enduring features of the retail financial services markets, such as asymmetries of information between producers and consumers, and business models which entail cross-subsidies between loss-making core products and very high margin related products. The FSA is shifting its approach to conduct risk analysis which aims to identify these underlying drivers of potential risk, and to an approach to conduct policy which will allow intervention at earlier stages in the product design and marketing process, rather than focusing solely on sales processes and customer redress when detriment does arise.

The FSA has also published a series of Sector Digests that consider in more detail trends and risks in specific sectors: the banking sector, the insurance sector, the retail intermediaries sector and the asset management sector.

The analysis behind the FRO helps inform how the FSA sets priorities and deploys its resources. The FSA’s Business Plan, which is due to be published this week, describes those priorities and the resulting resource requirements.

View Financial Risk Outlook 2010, 10 March 2010