The UK’s Financial Services Authority suggests that investor confidence and firms’ ability to run their businesses have both been hampered by the troubled financial markets.

The FSA published its Financial Risk Outlook today, warning firms and consumers of the risks inherent in a significantly less benign economic environment. The FRO focuses on the risks arising from the events of the second half of 2007 and the economic outlook expected over the next 18 months.

Its central scenario identifies the five priority risks. It suggests that the existing business models of some financial institutions are under strain as a result of adverse market conditions; and, it warns that increased financial pressures may lead to financial firms shifting their efforts away from focusing on conduct of business requirements and from maintaining and strengthening business-as-usual processes.

Additionally, the FSA suggests that market participants and consumers may lose confidence in financial institutions and in the authorities’ ability to safeguard the financial system. Also, it says that a significant minority of consumers could experience financial problems because of their high levels of borrowing.

Finally, the regulator warns that tighter economic conditions could increase the incidence or discovery of some types of financial crime or lead to firms’ resources being diverted away from tackling financial crime.

“To be clear, 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, the chairman of the FSA. “Firms and consumers need to recognise there are both short and long term risks and should think about the implications.”

“Firms are clearly more aware of these risks now and should continue to consider how they would respond to a crystallisation of these risks particularly those relating to capital and liquidity,” he added.

The FRO sets out some key messages to help firms consider how to respond to both the priority and any sector specific risks. The paper also highlights the need for consumers to understand how possible changes connected with the priority risks could affect their finances and spending.