By Julian Knight BBC News Online personal finance reporter

Sir Howard: investigation meant to lead to compensation

Victims of the scandal surrounding split-capital investment trusts will be compensated, the outgoing chief of watchdog the Financial Services Authority (FSA) has said.

Speaking at the FSA's annual public meeting, Sir Howard Davies said he was determined to see justice for investors who were mis-sold or misled into buying the controversial savings products.

He said the FSA's investigation into the scandal had widened and was now the biggest probe the watchdog had conducted.

Sir Howard declined to name firms being investigated but did say the FSA was reviewing thousands of pages of documentation and hours of recorded conversations in an attempt to establish whether there was collusion among split-cap providers.

He was less sympathetic to the plight of endowment mortgage customers, suggesting that some facing shortfalls had not been mis-sold and were "gumming up" the complaints handling system.

Fund fragility

Split-capital investment trusts are complex investments that were marketed as an ideal way to save for retirement or school fees.

The ultimate aim of the investigation is to secure compensation for investors Sir Howard Davies

But high levels of bank debt, particularly in trusts launched at the end of the dot.com boom, exposed the funds' fragility when market conditions worsened.

In total, 19 trusts in the sector have gone to the wall taking an estimated �770m of investor money with them.

As a result, as many as 2,500 complaints have been lodged with the Financial Services Ombudsman over split-caps.

Justice

Although the FSA does not have the power to regulate split-caps, the watchdog launched a probe last year.

The FSA is investigating allegations of collusion by fund managers, mis-selling by financial advisers and distribution of misleading marketing material which could have given investors the impression the investment carried no risk.

Some firms complaints systems are currently snowed under by indiscriminate claims for compensation by endowment mortgage policyholders Sir Howard

So far, 60 FSA officials have been drawn into the investigation and documents and e-mails filling 700 lever-arch files, and taped conversations over a 12-year period have been collected.

Sir Howard told the public meeting: "We and the financial ombudsman service are determined to secure justice for those investors whose interests were damaged by this mis-selling, or collusive behaviour."

Ultimate aim

When pressed by BBC News Online, Sir Howard confirmed that "justice" involved fining firms found guilty and compensation payouts for investors who were mis-sold or mislead.

"The ultimate aim of the investigation is to secure compensation for investors," Sir Howard told BBC News Online.

The emphasis on misleading marketing opens up the possibility of investors receiving compensation even if they made the investment without taking financial advice.

No timescale was given for completing the investigation.

Endowment claims

The public meeting was one of the last FSA public engagements for Sir Howard before he takes up the post of head of the London School of Economics in September.

Sir Howard is to be replaced as FSA chairman by energy market regulator Callum McCarthy.

On endowment mis-selling, Sir Howard cast doubt on the claims of many consumers facing a shortfall.

"Some firms' complaints systems are currently snowed under by indiscriminate claims for compensation by endowment mortgage policyholders," he said.