IF YOU had any faith left in split-capital trusts, it must now be crushed. A report published by the Treasury select committee exposes serious wrongdoing in the sector and accuses companies of failing to alert investors to the risks of split caps. Marketing literature was shamefully misleading and advisers were woefully incompetent.

Where was the regulator while all this was going on? MPs concede that split caps do not fall into the official remit of the Financial Services Authority (FSA), but the watchdog gets a bashing for its jobsworth attitude to consumer protection.

More than £6.5 billion has been wiped off the value of split-cap shares since 1999, almost half the market’s total worth, leaving about 20,000 investors with big losses.

People with income and capital shares have been hardest hit. But investors in zero-dividend preference shares — once universally described as low-risk — have also lost out. Trading in shares of 19 trusts is suspended, and a further 20 are in serious difficulty.

The split-cap tale is a sorry one. A new breed of split caps launched after 1999 often borrowed heavily from banks to fund share purchases and bolster returns. When the market fell, this gearing only served to magnify the losses.

Worse, many split caps conducted incestuous relationships, buying shares in each other’s trusts — so a drop in the price of one had a knock-on effect on the others. By the end of March 2002, 83 splits had cross shareholdings. Of those, 27 had more than 40% of their portfolio in other splits; 11 had more than 70%. The report described some of the crossholdings as little more than sophisticated pyramid selling.

The FSA is investigating whether some managers were guilty of collusion in propping up share prices, making it difficult to gauge the level of risk in a trust. It is also looking for evidence that advisers mis-sold split-caps.

The Treasury select committee has little doubt on either count. It calls on the FSA to punish the guilty firms and individuals, and bring the regulation of investment trusts into its mandate.

It also asks the regulator to clarify the apparent conflict of interest between its own mis-selling inquiry and the scheme set up by the Financial Ombudsman Service to compensate investors who were mis-sold splits.

MPs want investment companies to face their responsibilities and pay speedy compensation, presumably to make up for their attempts to stall any payments and deny any malpractice.

The report gives hope to investors — but I suspect we will have to wait before companies cough up any money.

Daniel Godfrey, head of the Association of Investment Trust Companies, is already warning of delays, which he blames on liability insurers. And so the buck gets passed.

The FSA’s record on these matters is not good, either. It took forever to consider the possibility that endowment mortgages were widely mis-sold. It also seems much happier writing one of its many consultation documents than doing anything useful — only last week it produced 273 pages on streamlining consumer information. Really, you couldn’t make it up.

But this is no joke. If the regulator does not do its job properly, trust in the financial services industry may never be restored.