On January 29, the UK Financial Services Authority (FSA) published its latest Financial Risk Outlook warning firms and investors of the risks inherent in a significantly less benign economic environment. The Financial Risk Outlook is focused on the risks arising from the events of the second half of 2007 that have led to tighter financial conditions.

The Financial Risk Outlook notes that risks have increased considerably in the last year and that the recent tightening in financial conditions may have exposed some firms’ business models as being potentially unsuitable in more stressed financial conditions.

The FSA has identified five priority risks for 2008: (i) existing business models may be under strain as a result of adverse market conditions; (ii) increased financial pressures may lead to firms shifting efforts away from conduct of business requirements and from maintaining and strengthening business-as-usual processes; (iii) market participants and consumers may lose confidence in financial institutions and in the regulatory authorities’ ability to safeguard the financial system; (iv) a significant minority of consumers could experience financial problems because of high levels of borrowing; and (v) 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 Financial Risk Outlook's conclusions are a key element in the FSA's priority-setting arrangements which will be set out in its business plan due to be published on February 5.