The Financial Services Authority, the Treasury select committee even the Serious Fraud Office have become involved in the troubled split-cap...

The Financial Services Authority, the Treasury select committee even the Serious Fraud Office have become involved in the troubled split-capital investments trusts industry. Out there, though, lost in the haze are two groups of worried people: consumers and financial advisers.

The problem is that amid the excitement, everyone has forgotten about them and obtaining justice for these two parties who turn up on opposite sides in the conventional consumer complaint. Their interests in this area are not exactly the same.

Nevertheless, some coordinated thinking on the part of the FSA and Financial Ombudsman Service, aided and abetted by the various trade bodies could produce a perfectly reasonable set of solutions to the existing mess for those concerned, however.

What are the issues in this area? Split-cap trusts, despite the fancy name are nothing more than investment trusts of a certain type. They issue different types of shares: income and capital (hence the word split). That, though, is not what is important here. The other relevant feature is that these trusts have also issued preference shares on which some are unable to pay the dividend or interest payment.

There are also funds of funds in this area. So, customers may have unit or investment trust investments invested in this field. Investment trusts differ from unit trusts in their ability to borrow. This correspondingly increases the risk of insolvency.

There are three quite distinct compliance problems to consider here. First, a marketing group may have promoted the investment trust shares and its debt instruments in a misleading way. Comments like "as safe as a Volvo" might legitimately lead Volvo to consider legal action. More importantly in this context, anyone, adviser or consumer who relied upon these statements to their detriment will have lost out and might have a claim.

Other less contentious comments in advertising may create rights of action. If an investment trust has inaccurately described its investment policy or existing holdings, it may be just as misleading.

The second compliance issue relates to the individual adviser. The adviser must be able to show that they had good reason for selecting this particular type of investment and that the product was best suited to their client. They would also have had to disclose all the risks and disadvantages of the transaction. This means that one has look at the investment undertaken and check that it fitted the risk tolerance of the client and the objective that he had for the investment.

If the success of the plan was vital for the customer or he was uncomfortable taking a significant risk with the money concerned, there will be a problem here.

The difficulty is that a reasonably competent adviser should have realised that an investment trust debt instrument would depend on the solvency of the trust itself. So, the risk tolerance of the investment would have to take into account the likelihood of the investment trust failing.

Many investment advisers would argue that they were misled into believing that the trusts were relatively cautious in their policies. Aberdeen Asset Management on its web site presently makes the point that its principal holdings were well publicised, including its investments in other trusts, however.

An effect of this is that assessing a complaint against an adviser involves two difficulties. First, it is hard to assess the level of reliance that an adviser should have placed in the investment trust's publicity. Secondly, different people will disagree about the extent to which advisers should have relied on sources of information other than the glossy marketing material.

The third possible compliance difficulty relates to the investment trusts internal behaviour. If the investment managers put money into investments which fell outside the scope of the trust instrument, lacked good faith or demonstrated a failure to exercise reasonable care, they can be sued. This is where a discussion of whether there is evidence of collusion between fund managers comes in. Aberdeen notably denies any collusion or misconduct but as Mandy Rice-Davies famously said: "[t]he[y] would, wouldn't [t]he[y]."

At this point, we run into series of roadblocks on the way to any form of justice. First, the investment trusts themselves are only regulated by the stock market that lists them. So, the third type of claim probably has to go through the courts. The allegations of misleading marketing literature can just about make it to the FOS on the basis that the trusts' marketing departments will be separate regulated companies.

The most important problem for anyone receiving a complaint is that the FOS has no power to resolve disputes between regulated firms. So, an IFA who has upheld a complaint against himself cannot use a reference to FOS to insist that an investment trust's marketing department bear a share of the costs. If he tries to slow up the complaints process so as to ensure that investment trust deals with the case first, he risks being punished for breaking the complaint rules.

Another issue for the adviser is to decide whether he can deduct anything from compensation to take into account the fact that another firm (the investment trust's marketing arm) may be partially to blame. Legally, the answer is: no. The complaint rules do not say that firms have to apply the strict letter of the law to complaints, however. After all, the FOS does not have to. It can reach fair and reasonable decisions instead. Is it fair to leave investors in the lurch in this way, however?

There is much discussion going on behind the scenes between the various trade bodies and the FSA. A possible way forward might involve advisers on receipt of a complaint from a client offering to make a complaint against those who misled them while looking at their own case. If they uphold the complaint, the adviser could promise to pay the full amount of the compensation in the event that agreement could not be reached with the marketing groups concerned. It would have to offer immediately a reasonable amount to reflect its share of the blame.

This does not quite work because the latter might say that the client had been fully compensated by this promise. Still, advisers should certainly help their customers put forward valid complaints. It would increase the pressure on the investment trust marketing companies to settle on a share of responsibility.

A better and complementary way forward is the creation of a binding dispute resolution mechanism for advisers and those involved in marketing them to adjudicate on the relevant share of responsibility. The consumer would then be paid in full by whoever received the justified complaint. Then in the event of any disagreement about a third party claim against another firm, the arbitration arrangement could reach a definitive answer. In this way, the very existence of the body would probably guarantee that it was never needed. People would negotiate, knowing the likely answer.