The Financial Conduct Authority has set out its view of the key risks across financial markets for the forthcoming financial year in its 2014/15 Risk Outlook.
Published alongside the FCA’s Business Plan, the document shows which conduct and prudential issues the FCA will be focussing its attention on in the year ahead.
The pace of technological change, house price growth and retirement products were among the most significant risks highlighted by the regulator.
Firms should consider how these issues might affect their business and what steps need to be put in place to mitigate them. The FCA will work with firms in the year ahead to address the risks it has raised and help ensure consumers’ interests are put first.
Christopher Woolard, FCA director of policy, risk and research said:
“By highlighting issues that could affect a number of consumers early, firms can take steps to address them before the damage is done.
“As well as the importance of being alert to emerging risks and adapting to the changing economic situation, this work highlights the need for firms to embed good conduct.
“As a forward looking, judgement-based regulator understanding where risk develops, helps to prioritise areas where we should intervene, and links to the work we will undertake this year.”
The Risk Outlook highlights seven forward looking area of focus:
- Whilst rapid technological changes can offer clear benefits for consumers and firms, they also create specific risks - including over-reliance on third parties to provide and oversee IT systems, or open up new opportunities for fraudsters to engage in financial crime.
- Poor culture and controls could continue to undermine confidence in institutional and retail markets. Setting the right culture, underpinned by the right incentives structure, is key to stamping out poor conduct.
- Firms with large numbers of existing customers (back books) have an incentive to act against their best interests, particularly where consumers don’t often switch between products or accounts. For example, large firms may take advantage of big data to re-price products or change terms and conditions, or cross-subsidise products for new consumers to undermine competition.
- Consumers may get a poor deal from complex, opaque or overpriced retirement income products, with hidden charges or fees that make it difficult to compare options across the market. Costly exit fees may mean consumers remain trapped in poor value products.
- The rapid growth of consumer credit, in particular, the growth of costly products or products with complex features could mean that consumers find it harder to select the right product, or to effectively manage their use of credit.
- Overly complex terms and conditions make it harder for consumers to compare products, or fully understand the features of the products they buy.
- House price growth could encourage firms to lend to riskier borrowers, whilst consumers could find that they’re unable to manage higher payments if interest rates rise.
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