The Financial Services Authority is expected to reject calls from the Government for greater regulation of distressed split capital investment trusts when it publishes its latest findings on the sector in the next few weeks.
Lord McIntosh of Haringey, the Government's Deputy Chief Whip in the House of Lords, said in a parliamentary debate last week that the Government would consider beefing up rules governing split caps after thousands of investors in the trusts lost money.
Politicians and consumer groups have criticised the current financial services regulations because they do not require the FSA to police split caps in the same way that it scrutinises unit trusts. This is because split caps, a type of investment trust, are quoted companies and are governed by the Listing Rules.
Critics argue that this has meant companies which provide split cap funds have been able to get away with poor practice, such as selling them as low-risk investments when in fact they were quite high risk.
But the City regulator, which has been investigating the sector for months, is understood to believe that there is no need to change the current regulations. It will say so in a discussion paper on split caps out by the beginning of next month.
Another reason the FSA is resistant to change is because it would require more primary legislation at a time when it is still bedding down the mammoth Financial Services and Markets Act, which came into force last November and gave the FSA its official powers.
The Treasury is believed to agree that more financial regulation is undesirable because it could interfere with the fundamental tenet of the City that the shares of quoted companies should not be regulated.
While the FSA and Treasury are expected to ignore calls for more regulation, they are likely to back allegations that there has been some mis-selling. They will probably also confirm that there is evidence of collusion between some investment managers within the so-called "magic circle" to artificially inflate each others' shares by holding large cross holdings in their trusts.
Lord Newby, the Treasury spokesperson for the Liberal Democrats, said: "I believe the FSA has found there has been misbehaviour, of some companies selling these investments as low risk and over collusion."Reuse content