There are risks involved in individual investors taking more responsibility for their finances, coupled with a proliferation of increasingly complex retail products, says a new report from the U.K.’s Financial Services Authority.

The finding comes in the regulator’s Financial Risk Outlook 2005 report, published today. The report details the risks that it sees facing the financial sector and its customers.

The report also establishes the background against which the FSA sets its priorities for the year, which will be detailed in its business plan to be published next week.

The report highlights a number of priority risks including the need for people to take greater individual responsibility for long-term financial provision, the popularity of some consumer products that are very complex, and the need for rigorous risk management by firms of complex and relatively illiquid instruments.

The report also considers three variations on a central scenario of sound domestic and global economic performance in the year ahead.

“People are having to take increased responsibility for their pensions and other long-term financial arrangements. The products designed to meet these needs are sometimes difficult to understand and explain. They are being sold by an industry undergoing significant structural change. The financial industry, too, is dealing with more complex instruments that produce operational, credit and liquidity risks,” said FSA chairman Callum McCarthy.

Among the other priority risks identified in the report are:

  • changes in the distribution of retail financial services and the introduction of basic advice for the sale of stakeholder products, notably that the benefits of greater competition and accessibility to advice could be impeded if compliance standards are allowed to slip;
  • the need for firms to manage financial and operational risks carefully to keep up with the pace of financial innovation;
  • at a time of low yields and in the current benign economic environment, the danger that firms may relax controls or may enter into excessively speculative investments; and
  • threats to business continuity, including terrorist threats.