An influential House of Commons committee has accused the City watchdog of "misleading" statements and a "cover-up" over warnings about split-caps.

This is a stain on the whole investment industry and we have got to cut this cancer out John McFall MP, chairman of the select committee

The dispute centres on correspondence received by the Financial Services Authority (FSA) in April 2001 from Peter Moffat from the Guernsey regulator, warning about the "incestuous nature" of split-capital trusts.

In a hearing last month of the Treasury Select Committee, John Tiner, one of the FSA's managing directors, said there had been no correspondence about the issue from the Guernsey regulator.

At Thursday's hearing, the FSA denied that it "leant on" the Guernsey regulator.

In the summer, Mr Moffat wrote a letter to a Guernsey newspaper, which said he had not issued a "warning" to the FSA.

"There is a strong smell of a cover-up here," said David Laws, Liberal Democrat MP for Yeovil.

Letter appears

The split-capital trust fiasco is the latest scandal to hit the financial services industry.

The complex investments have been popular with people investing for school fees or retirement.

But a number of trusts, which had high levels of debt and cross-holdings, collapsed when the market worsened.

It has been estimated that investors could lose up to �3bn from the fiasco.

At the hearing on Thursday, MPs, who were clutching copies of the letter, accused Mr Tiner of misleading the earlier committee.

According to notes from the hearing last month, Mr Tiner had said: "There was not any correspondence."

The letter in question was originally sent to an official at the FSA.

It said: "I am still concerned at the potentially incestuous nature of this business and we have been stepping up our required risk warnings as a consequence."

Mr Tiner told the earlier hearing that he had spoken to the official, who had said there was "no explicit recollection that there was a particular warning in this case".

Committee member David Laws, Liberal Democrat MP, accused Mr Tiner of misleading the committee.

"We have been misled on this, quite clearly," he said.

Mr Tiner denied the allegation.

"The information I had was that we had not received correspondence, and I answered honestly and properly.

"Since then, we have discovered that there was this letter and had I known that at the time, I would have said that."

Cover-up?

In another twist, the committee accused the FSA of a "cover-up".

Mr Moffat of the Guernsey regulator, who had alerted the FSA about the nature of some of the trusts, wrote to the Guernsey Press newspaper in July.

In that letter, he said it would be wrong to say that he had issued a "warning" to the FSA.

Sir Howard Davies, chairman of the Financial Services Authority, denied that the authority had "leant on" Mr Moffat into retracting his earlier comments.

Sir Howard said the FSA had ensured prospectuses had adequate risk warnings, and that it did not identify evidence of a major problem with the trusts at that time.

But Mr Laws said: "Can you understand that there appears to us to be some scepticism about this whole process, and a fear that what is happening is a cover-up of warnings that were given by the Guernsey regulator?"

Sir Howard replied: "I don't believe we have been trying to cover up on this issue."

Cancer in the industry

John McFall, committee chairman, said the whole split cap scandal was "a stain on the whole investment industry" and a matter of urgency for the FSA's attention.

"We have detected a leisureliness, a casualness and unacceptable culture of what has happened.

"Ordinary people have been let down very badly on this."

The FSA itself does not regulate split capital trusts.

But since May 2000, the FSA has been responsible for the Listing Authority, which oversees the approval of prospectuses - and some marketing material.

The watchdog is currently investigating a number of firms about the way split caps were sold.