The city watchdog has stepped up its investigation into split caps, with the announcement that it has started swooping on investment firms involved in the controversial trusts.

The review started this week and focuses on financial advisers, who sold and marketed the products, and investment managers.

The Financial Services Authority wants to determine if there is any evidence of misselling or collusive behaviour within the so-called "magic circle", which could constitute market abuse.

Split capital investment trusts are investment trusts with several different classes of shareholder - and divided into income and growth shares.

Crossholdings?

In particular, there has been concern that "cross-holdings" between different fund managers may have helped to boost the value of shares in split-cap funds launched in the last two to three years.

The FSA originally launched an investigation in December 2001, after concerns were raised about these investments.

Its own research in September illustrated crossholdings between fund managers.

Research on 113 splits established that on average 17% of a trust's gross assets were invested in other splits.

The majority of trusts in the �13bn split cap sector invested less than 2% in other split cap trusts, a fifth of them invested more than 40%, and 10% invested more than 60%.

The FSA would not say how many firms it was investigating and stressed that there was no evidence of misselling or collusive behaviour.

Under the FSA's powers it has the right to see any documents relating to "the operation of investments and investment decisions".

However, it can not automatically demand access to some documents, such as confidential board minutes.