FSA paints grim picture for 2008

The FSA has been criticised for its handling of Northern Rock

High levels of borrowing could land "a significant minority" of people in trouble in 2008, the Financial Services Authority (FSA) has warned.

Its Financial Risk Outlook also said that adverse market conditions were putting the business models of some financial institutions under strain.

The FSA expects that tighter economic conditions will increase the amount of financial crime being uncovered.

It is also worried that people may lose confidence in financial regulators.

"Market participants and consumers may lose confidence in financial institutions and in the authorities' ability to safeguard the financial system," its report said.

'Failed abysmally'

The FSA itself was criticised by a committee of MPs for failing to spot the "reckless" nature of Northern Rock's business plan before the bank ran into trouble and had to seek financial support from the government.

The Treasury Committee report said the FSA had failed to "stress-test" Northern Rock's business model sufficiently and that financial stability safeguards had "failed abysmally".

News of Northern Rock seeking emergency funding led to a run on the bank as customers queued to withdraw their savings.

The FSA stressed that its latest report was supposed to identify risks rather than predict events.

"These are not firm predictions about what we think will actually happen, but are a prudent attempt to highlight the risks that could impact consumers and firms in a less benign economy," said Callum McCarthy, chairman of the FSA.

"Firms and consumers need to recognise there are both short- and long-term risks and should think about the implications."

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