The business column - Patrick Hosking beware the advisors

There is not a single case of a chief executive of a major financial services company resigning over

No one celebrates the beneficence of market forces more heartily than those in the financial services industry. Bankers, insurers and investment professionals wax happily about the near-mystical way that individual choices, though selfish in themselves, lead collectively to the best of all possible worlds.

Yet it is in the financial services industry, above all other sectors of the economy, where Adam Smith's "invisible hand" goes wonky. Companies that treat their customers badly are not punished as they should be by falling demand, lower profits and sliding share prices. Companies that treat customers well do not necessarily prosper.

Customers are skimmed, inconvenienced, messed about, stressed out and sometimes plain ripped off. Pensions mis-selling, endowment mis-selling, Equitable Life, precipice bonds and split capital trusts have created millions of victims. The pushing of overpriced credit protection insurance is a scandal, while mortgage equity release products are already shaping up as the industry's next big area of abuse.

Meanwhile, the payments system, the plumbing at the heart of capitalism, remains an unassailed, unreformed and misunderstood cartel that daily squeezes out unimagined wealth for the handful of banks that operate it.

Peter Vicary-Smith, the chief executive of Which? (the new name for the Consumers' Association), has grasped the problem. He calls financial services "probably the most dysfunctional market" in Britain.

Vicary-Smith, who used to be a big wheel in the charity world, has just embarked on a campaign likely to be far tougher to win than any of the mammoth fundraising tasks he set himself at Oxfam and Cancer Research UK. He wants nothing less than to reform the entire industry.

He highlights the usual suspects to explain why normal market forces so plainly fail to work: the abysmal levels of financial literacy among consumers; management and pay structures in companies that encourage staff to pursue reckless, mis-selling strategies; and weak regulation, which favours suppliers over consumers. As he says, there is not a single case of a chief executive of a major financial services company resigning over mis-selling. When bosses disappoint shareholders, they still sometimes get fired; when they disappoint consumers, almost never.

Which? is floating a raft of proposals under its "Time for a change" campaign. Some - such as consumer representatives on bank boards and the disclosure of customer satisfaction information - will doubtless be greeted with absolute horror by the industry.

Others - such as reform of the way bank sales staff and their bosses are remunerated - are crying out to be taken seriously. Which? is also considering becoming an accreditation agency, an arbiter of good and bad practice which names and shames the laggards.

Again, an excellent idea for the one in 20 of the adult population that is consumer-savvy, reads the financial pages and scours the best buys tables. Meanwhile, for the millions who don't, and are routinely fleeced as a result, the best hope still lies in financial education.

Forget the north-south divide. So 1990s. Instead, the chasm that increasingly disunites the nation is the divide between workers in the private and public sectors. The government's U-turn last month on public sector pension reform means that resentment in the private sector is almost certain to grow. The government abandoned its attempt to raise the retirement age for existing public sector workers from 60 to 65.

Unfunded (not yet paid for) pension promises to public sector workers are already at £690bn, according to the actuaries Watson Wyatt, and will now inevitably balloon further - a bill that future taxpayers not yet born will have to foot.

Meanwhile, their chances of enjoying a guaranteed pension in the private sector will be close to zero. Defined benefit (guaranteed) pension schemes still open to new recruits in the private sector are an endangered species.

Public sector workers are already on higher wages than private sector workers and have enjoyed much larger pay rises in recent years. But the real differentiator is their guaranteed pensions, which are enormously valuable. Unless there is a dramatic improvement in investment returns or a sudden collapse in life expectancies - neither at all likely - private sector workers are going to have to make do with sharply inferior retirement benefits to their public sector peers.

With private sector workers outnumbering those in the public sector by three or four to one, this should be a rich seam for the Tories to exploit. Fortunately for Labour, one of the few senior Tory frontbenchers who actually grasps these complex issues - David Willetts - has been removed from the work and pensions beat.

Patrick Hosking is investment editor of the Times