The high number of firms in the financial services and advice market means it is "really easy" for bad actors to hide, the FCA has said.
Speaking on the Inside FCA podcast, Debbie Gupta, director of consumer investments at the regulator, said the regulated market was dominated by "lots and lots of small firms" which made it difficult for investors to navigate and easy for bad firms to hide from the regulator.
“6,000 firms and over 27,000 individuals provide services in this space to help us understand where we might invest, how we might invest, and provide advice to consumers.
"And that means that it’s really difficult for us to understand what good looks like, it’s really difficult to find trusted firms that do their work well. But also, for the regulator, it’s really easy for bad actors to hide in this market because there are so many of them.
"And so those three things combined mean that we are really clear that this market isn’t working for consumers in the way that we want it to."
Gupta said the regulator was doing "lots and lots of work" to tackle harm in this market, including through supervision, how it authorises firms at the gateway, and enforcement action but needed the support from the industry also.
One area of advice the regulator has already "cleaned up" was DB advice, where firm numbers have shrunk by two-thirds, from 3,000 in 2018 to 1,200 now.
"While that is not great for the firms that are no longer operating in the market, it’s a much better outcome for consumers because they are now able to feel more confident about the firms that they need to go to for that kind of advice," she said.
Gupta said financial advice for most people on straightforward investments was "pretty good" but DB was an area where the FCA "absolutely [had] to crack down on".
She said in order to reduce the cost and impact of poor DB advice the regulator had focused on the advisers who operate in this market, raising standards and "cleaning up the market".
Next the regulator will put its sights on how to make sure advice firms are able to put things right when things go wrong.
It has already said in its consumer investments strategy it wants to address capital adequacy requirements for firms as well as introduce a possible policing mechanism through third-party audits.
Gupta said: "I think we in the UK are probably a bit different to other jurisdictions and other countries, but it only costs about £20,000 to set up an advice firm, in terms of holding capital for providing that kind of service.
"And then when you look at the Financial Services Compensation Scheme, which is essentially where consumers end up going if a firm can’t pay compensation that’s due, the average compensation pay out from the FCSC is about £30,000.