By Sarah Toyne BBC News Online personal finance reporter

Some companies involved in split capital investment trusts and zeros have been guilty of "excesses and misstatements", unfairly casting a "cloud" over the sector, chief City regulator Sir Howard Davies has said.

The comments come from notes Sir Howard made for a speech last month.

Excesses and misstatements of a few managers have cast a cloud over the whole sector - many firms who don't deserve it

Sir Howard Davies' notes

They show that Sir Howard is not afraid of criticising how some of these products, which were often marketed as low-risk investments, were sold.

They also emerge at a time when the Financial Services Authority is preparing to publish a report into split-cap trusts.

Private investors

Thousands of private investors have piled into zeros and split-cap investments - many on the promise that they were low-risk products.

Since the market has tumbled, many of these products have failed to perform as well as predicted, with some private investors expected to lose their life savings.

His comments certainly raised eyebrows

Finance professional

The report is likely to be unwelcome reading for many in the financial services industry, but despite what some newspaper reports said on Tuesday it will not necessarily be good news for investors.

Depressing picture

Sir Howard has never minced his words when it comes to split caps.

In November, he gave a robust speech to the Confederation of British Industry (CBI), which criticised how some of these products had been sold as risk-free.

On the day after this year's Budget, he stunned an audience from the City and the financial services industry, at a Securities Institute dinner.

He said the story was "depressing" and, quoting from a large fund manager's marketing brochure published in 2000, highlighted how zeros had been marketed as a low-risk investment.

"Zeros pay no income but offer a fixed capital amount on a specified future date. This gives you the security of knowing what returns to expect [compared with] deposit accounts where interest rates can change," he said, according to the notes obtained by BBC News Online.

"Excesses and misstatements of a few managers have cast a cloud over the whole sector - many firms... don't deserve it."

One diner described the reaction in the room: "There were sharp intakes of breath, and some were counting their dinner plates.

"His comments certainly raised eyebrows around our table."

City concerned

The FSA's report is due to be published on Thursday. It will leave certain sectors of the industry with "egg on their faces", a FSA source has told BBC News Online.

But the City regulator is remaining tight-lipped about details.

A newspaper report on Tuesday said firms would be ordered to compensate "tens of thousands of investors", but this has been dismissed by FSA sources.

It is "early days", according to the FSA.

Also dismissed was a statement that people who bought plans directly from press advertisements would not be able to claim compensation.

The rules are clear on this issue. People who have bought through an intermediary, for example a financial adviser, can go to the Financial Ombudsman Service.

Those who buy direct are not covered, and must seek redress through other channels.

Whether the product was advertised in the press is inconsequential, the FSA said.

Collusion allegations

It is unclear whether the report will provide relief for those investors who have lost thousands of pounds through the schemes.

It is also not clear if firms involved in split caps "colluded" in a so-called magic circle.

The magic circle is the term used to describe a situation in which several fund managers had substantial holdings in other managers' funds.

When markets were rising, this had a beneficial effect on fund values, but as the markets started tumbling funds which had substantial crossholdings dragged one another down.