FSA sounds warning note despite benign economic outlook

FSA sounds warning note despite benign economic outlook

The Financial Services Authority warns today of the "high degree of uncertainty" facing consumers and firms despite the benign economic outlook, writes Jill Treanor .

Introducing the regulator's financial risk outlook - which sets out the risks the FSA is monitoring for 2005 - chairman Callum McCarthy described the detailed document as illustrating "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," he added.

Among the nine "priority risks" outlined by the FSA is the yawning savings gap - the gap between what consumers are saving for old age and the amount they should be putting aside for a comfortable retirement.

The City regulator notes that consumers are continuing to build up debts when they could be saving for old age and that some consumers may be relying too heavily on their properties to fund their retirement.

The City regulator uses a number of scenarios to try to predict what might happen to consumers, firms and the wider economic system. In one, house prices fall by 30% and it predicts that the decline in household wealth would increase the size of the savings gap and encourage mortgage lenders to reduce the size of loans, potentially holding back their profits.

Such scenario testing is regarded by the FSA as a "useful tool" to ensure firms' risk.....continued below

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management tools are robust.

It believes the priority risks it has identified could be sources of financial instability. For instance, hedge funds have exposures that are sensitive to interest rate rises and sharp currency movements. The FSA notes that they are not as leveraged as in the past but have the ability to take on more debt because of unused loans offered to them by broking houses competing for business.

The FSA discloses that it is trying to obtain data from brokers about the hedge funds that are financed directly by them and by their parent companies.

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