The Financial Conduct Authority (FCA), which is responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA) in the UK, has highlighted what are believed to be key risks across British financial markets for the forthcoming financial year in its 2014/15 Risk Outlook, which it published on Monday.
Details of seven conduct and prudential issues that the FCA will be focusing its attention on in the year ahead are included in the document, which is published alongside the FCA’s Business Plan.
According to the regulator, one of the most significant risks includes the pace of technological change. Although new technology is beneficial for both consumers and firms, it creates specific risks such as an over-reliance on third parties to provide and oversee IT systems. Fast changing technologies can also provide fraudsters with new opportunities to operate in financial crime.
Another key risk identified in the FCA 2014/15 Risk Outlook is the rise in house prices, which could encourage financial providers to lend to riskier borrowers. Also, if there is a rise in interest rates, consumers could find that they are unable to manage higher payments.
Retirement products are a cause for concern, as complex, opaque or overpriced retirement income products can result in consumers getting a poor deal. Hidden charges or fees can make it difficult to compare options across the market and costly exit fees may mean consumers have to continue with poor value products.
Confidence in institutional and retail markets could still be undermined by poor conduct and controls. The FCA believes that setting the right culture, underpinned by the right incentives structure, could solve the risk of poor conduct.
There is also a risk that companies with a large number of existing customers are not motivated to act in the consumer’s best interest, especially when their customers rarely switch between products or accounts. Some firms have taken advantage of big data by re-pricing products, changing terms and conditions or cross-subsidising products for new consumers, in an effort to undermine competition.
In addition, the consumer credit sector has grown rapidly, including costly products or products with complex features. This can mean that complicated terms and conditions make it more difficult for consumers to compare financial products and fully understand what they are buying. Complex features can prevent consumers from effectively managing their use of credit.
The FCA said companies should consider how these issues might affect their business and what steps need to be put in place to mitigate them. The regulator added that it will work with firms to address the risks it has identified and help ensure that the interests of consumers are put first. These measures are in accordance with the FCA’s three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
Christopher Woolard, FCA director of policy, risk and research commented:
“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.”