Although the Outlook's central scenario is based on expected stronger economic performance in 2004 both in the UK and globally, possible alternative scenarios are sketched out which involve significant risks to firms and consumers.
Consumer responsibilities
FSA Chairman Callum McCarthy said:
"Consumers will have to take on greater responsibilities, and need to think about the risks involved. A major theme in this year’s report is the need for consumers to provide for their future over the longer term. They are becoming responsible for decisions previously taken by government or by employers. Given the way government policy is developing here and in many western economies, with the state being rolled back in areas such as pension provision and funding for education, it is all the more important that consumers take control of their finances over the longer term.
"This means thinking hard about what levels of debt they can afford, against a background where most commentators expect interest rates to rise, and when continuing low levels of inflation mean that debts, once incurred, will not be eroded by inflation. That is why we are encouraging consumers and also firms to think not only how they will cope with a relatively benign set of economic circumstances but also about what risks they face and how to manage these.
Implementation challenge
"Firms in both wholesale and retail activities will be facing a particular challenge in the next few years as a great raft of important and long-awaited international and domestic policy reforms comes to fruition. Inevitably managing and implementing these changes effectively will impose costs on firms, and pressure on us as regulators. Both we and the industry will need to continue to work very closely to minimise the risks, and maximise the opportunities".
Financial Risk Outlook 2004 considers longer-term trends that pose challenges to the financial services industry, consumers and to regulators. These include:
* the increasing imperative for individuals to take responsibility for planning their own financial affairs;
* the persistence of a low inflation environment which has contributed to the rise in consumer indebtedness and also means that such indebtedness remains high in real terms;
* an ageing population requiring people to make greater financial planning by people for what are likely to be significantly longer periods of retirement. Life expectancy increasing by more than forecast can also adversely impact on the life insurance industry;
* The increasing influence of the European Union on the financial services industry and the need for regulatory reforms to be proportionate and not to impede competition.
The FSA's programme of work for 2004/05 to be published next week will explain how the FSA will continue to address the major issues that fall within its remit against the background of the changing environment described in the Financial Risk Outlook. Many issues are long-term in nature and require co-operation with others but consumers and regulated firms have the opportunity and responsibility to review their own particular circumstances on a continuous basis.
