A REPORT into the UK financial sector has called for a “much needed shift in culture” to tackle the City’s obsession with short-term rewards.

John Kay, a professor at the London School of Economics, said pay and bonuses need to fall in line with long-term goals rather than “short term gains”.

The review, commissioned by Business Secretary Vince Cable, called for numerous changes, including scrapping rules that oblige stock market-listed firms to publish updates every three months.

Prof Kay said: “A lack of trust and poorly aligned incentives have helped create a culture of short-termism in our financial markets.

“This is undermining their role of supporting innovative, sustainable long-term business performance.”

The report criticised a decline in relationships based on trust.

It said the financial sector needed to focus on producing returns for investors and savers and called for “investor forums” to be set up to foster closer engagement.

The report comes at a time when pressure is building on executive pay amid the so-called “shareholder spring” that has prompted numerous rebellions over pay.

Dr Cable will now consider the findings of the report, which he described as insightful and powerful and “describes vividly the flaws of the UK’s financial markets”.

It is thought that the report’s reforms, if implemented, could lead to fewer jobs for traders.

The report said more needs to be done to base pay on companies’ long-term performance and suggested that long-term incentives should be paid in shares that do not vest until after an executive has retired from the business.

However, the report does not want more regulation, but instead called for appropriate incentives to be introduced to help instil a long-term focus.

It also criticised “hyperactive behaviour” from executives who were focused on restructuring or mergers and acquisitions at the expense of developing the fundamentals of a business.

Alan MacDougall, managing director of shareholder body Pirc, said: “In almost every link in the chain there is a bias in favour of activity, regardless of whether this can be proven to be in the interests of either issuers or savers.

“Intermediaries seem to be the only group which unquestionably gains, but the lack of clarity about whose interests they actually serve has also corroded trust in the system as a whole.”