The Financial Services Authority (FSA), the City watchdog, has asked for views on the regulation of Split Capital trusts and whether financial advisers are qualified to sell them.

Split capital trusts are investment trusts, whose equity is divided into income and capital shares, which many people use to save for school fees or retirement.

The announcement coincides with the launch of a discussion paper by the FSA on Split Caps, otherwise known as Split Capital Closed End Funds, amid concerns that some have been over-exposed to debt and risk.

The regulator is now seeking advice on whether the level of disclosure and governance, along with training of financial advisers who sell the funds is sufficient and should be tightened up.

Under current rules, split caps are not authorised products regulated by the Financial Services and Market Act 2000, unlike, for example, unit trusts or open ended investment companies.

Growing concern

The FSA found "a minority" of funds were vulnerable to adverse market conditions, unless the level of cross-holding or debt was reduced.

The FSA is concerned that if markets fall further, such cross-holdings could endanger the solvency of the trusts - and consumers' investments.

As the prospects of many funds are tied together, if one falls there is concern that there could be "systematic" collapse.

Consumer protection

While they are not regulated products, split-caps must conform to Listing Rules, as nearly all are listed on the London Stock exchange, along with the FSA's "Conduct of Business" rules.

Under current rules, the trusts only have to disclose information about a holding with more than 5% of the fund's assets.

The FSA's consultation will decide on whether to lower the threshold to 0.5%.

The Association of Investment Trust Companies (AITC) has started publishing details of share holdings of split caps over 0.5% of gross assets to try and increase transparency.

The news follows the FSA's announcement last week that it was investigating a few split cap managers over allegations that they have been buying each other's stock to boost fees.