The investment industry is inefficient and in need of a radical overhaul if it wants to meet the needs of an under-served consumer base, Financial Conduct Authority (FCA) board member Mick McAteer has warned.
The founder of the Financial Inclusion Centre said at the TISA annual conference that cash-strapped consumers were deterred from investing in an environment that was inherently value extracting not enhancing.
He suggested the industry needed a series of reforms based on the 'holy trinity' of better regulation, enhanced corporate governance and self regulation, and more effective market forces and competition.
The investment industry had created a system that required capital to pass through "11-12 layers of intermediaries" between saver and the real economy, reducing the value for both, the investor and the economy, McAteer said.
He said the problem was exacerbated by the industry's creation of a raft of complex products and services in the last three decades, that required yet further efforts to shop around and spend more money before actually investing.
McAteer (pictured) told delegates: "The primary purpose of your industry is financial intermediation, your job is to match savings and investments for the real economy. And unless resource actually ends up in the real economy, by definition that undermines value creation in the real economy.
"As soon as you shop around you need more advice and more advice means more cost."
He acknowledged there were some good products and services in the market but said he found it hard to see the social benefits of recent financial innovations.
"I cannot find any compelling evidence that the nature and type of financial innovation that we have seen in the UK in the past three decades has overall led to better risk management, more efficient markets.
"Things like hedge funds and alternative investment bonds have not actually contributed to better wealth management or better efficiency in the market. They have simply introduced another layer and higher cost structures into the investment supply chain."
McAteer also said he had found that some of the best selling products, that were "significantly more expensive" than their substitutes, had actually not delivered any better outcomes.
Looking at all the criteria the market has not been very efficient, he concluded.
He warned that providers had to change their business models if they wanted to reach already cash-strapped consumers, who were more interested in spending their money on other consumer services.
This will be impacted further by prevailing economic uncertainty, which will see returns continue to hover around the 3% mark, making it more difficult for firms to create value for investors, he said.
"If you cannot reconfigure your business models and make yourself efficient and more relevant, increasing numbers of households in this country will not be able to reach your products and you will not be able to reach them to serve and meet their needs efficiently and cost effectively and fairly."
'VCTs and EIS compared' panel
Letter to Women and Equalities Committee
Decumulation panel debate
'Third of market could go'