Damning report finds City is no longer fit for purpose

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A high-level government review into the City of London has concluded that it is riven by short-termism and staffed by too many people earning too much money.

A report commissioned by business secretary Vince Cable is made public this morning and finds a financial sector that is no longer fit for purpose. Professor John Kay, a leading economist, has made his recommendations after scores of submissions and interviews with top business and investment people.

Mr Kay says that regulation needs an overhaul and that traders seeking short-term profits are not acting in the wider interests of the public and should be marginalised. His review comes when the stock of the banking sector has never been lower, given a seemingly constant run of scandals involving rogue trading, interest rate fixing and global money laundering.Mr Kay said:"There is a short-termism problem, and the largest source of that is the culture which is no longer based around long-term trust. It is based around transactions and trading. Regulation has focused far too much on behaviour and not enough on structure."

He agrees that his proposals would lead to fewer jobs for traders. He said: "There should be fewer of them and they should be paid less. The objective of fi nancial markets is not to provide jobs for traders. The real problem is that we have proliferated the number and the cost of the intermediaries."

His report, the Kay Review of UK Equity Markets and Long Term Decision Making, will make uncomfortable reading for many. He envisages a world in which fund managers become more powerful and think longer term. "We want to marginalise traders," he said. "And the way we do that is to have asset managers that are the centrepiece of all this. They should have fewer stocks that they hold for longer."

Mr Kay traces the breakdown in the City culture of trust back to the deregulation of the financial markets in the 1980s. He says the present public and political disgust at banks is a "great symbolic chance" to change things for the public good.

Professor John Kay says there has been a change in the city's culture since the 1980s when Big Bang, as it was dubbed, led to the deregulation of financial markets