FSA fears consumers can't afford debts
By Robert Miller (Filed: 26/01/2006)
The City's top watchdog warned banks, building societies and finance
houses yesterday they could suffer severe damage to their reputations
if the current turn in the lending cycle reveals "they have given
credit to large numbers of consumers who are unable to afford their
In its Financial Risk Outlook 2006 the Financial Services Authority
said: "Even in the current benign economic environment we are seeing
signs of growing distress among consumers, including more insolvencies,
more late payments on credit cards and a rise in mortgage repossession
"Our research shows that many consumers with significant
borrowing commitments are currently struggling to keep up, with
The watchdog also expressed concern that rising household debt
problems, coupled with the current economic slowdown, meant consumers
were taking financial decisions "with inadequate understanding of the
In the wake of misselling scandals, such as those involving personal
pensions, endowment mortgages and split capital investment trusts, the
FSA noted that many people "have become increasingly disengaged from
It also said some regulated firms were failing to make their product
literature and sales processes "sufficiently transparent. There remains
concern this could lead to unsuitable products being sold to consumers
who, in reality, have a low-risk appetite and low risk tolerance."
The FSA also warned large banks and trading houses that they need to do
more "stress" tests on their portfolios of sophisticated and complex
investment instruments, such as credit risk derivatives, to be able to
cope with a sudden shock to the world's financial systems.
These, it said could take a variety of forms including "natural
disasters (possibly driven by climate change), global pandemic,
political instability, in a major economy, a large terrorist attack, or
a major corporate bankruptcy, Market participants might find it
difficult to manage their positions in certain instruments and could
struggle to sell large quantities."
In one the strongest worded passages of the 100-page risk outlook the
FSA said the illiquid nature of some of these complex investments "may
increase the risks of conflicts of interest, or even fraud, to the
detriment of the investor and of market confidence more generally.
"A significant proportion of revenue, of both traditional and
alternative fund managers, comes from management and performance fees.
Since these fees are a function of asset valuations there may be
incentives to overvalue assets." Incidents of "false and fraudulent"
valuations are increasing, the FSA said.
Debt helpline swamped by anxious callers
- posted 14 years ago