McFall wants intermediaries to be protected from compensation claims
John McFall, chairman of the Treasury Select Committee, has called for financial advisers who recommended split capital investment trusts to be protected from the compensation culture.
In a contribution to The Split Capital Investment Trust Crisis, an account of the sector's problems in the early years of the millennium, McFall levied the bulk of the blame for the situation, in which some 20,000 investors lost money, on product providers.
The Labour MP also warned that their failure to prevent future problems would lead to politicians taking action to bring them in to line.
He said: "Some advisers bear a heavy responsibility for letting down their clients. Whether by their failure to diversify adequately, to understand what they were recommending or by simply making misleading descriptions of risk, they were committing mis-selling and will be liable to pay compensation.
"That is not to say that all advisers who recommended splits that later failed are guilty however. Many will have acted in good faith and on the basis of the information they were provided. The compensation culture should not sweep them up in its wake."
McFall, who has chaired the Treasury Select Committee since 2001, also criticised the narrow scope of the Financial Ombudsman Service's (FOS) remit.
This allowed investors to obtain compensation if they were mis-sold shares, particularly zero dividend preference shares, as a low-risk investment.
But they could not seek recompense if their losses in the market downturn after 1999 were magnified by illegal collusion between split managers.
He said: "It is clear that the lethal cocktail of increased gearing, aggressive accounting practices and extensive cross-holdings in other splits changed the nature of split capital products beyond recognition. Many individuals in the fund management and broking industry made more money in a few years than most ordinary working people do in a lifetime.
"There is little doubt that the fact shareholders of investment trust firms were not covered by the FOS, in respect of the actions of the investment trust's manager, has turned out to be a gap in consumer protection. The Committee would like to see this filled as quickly as possible."
However, the former junior Northern Ireland minister praised investment trusts' exceptional structure for making money for shareholders over the longer term and called on members of trust boards to be braver in the way they run their companies. He said they should avoid being restricted by the details of the Combined Code on corporate governance and the AITC's own code, which cover issues such as the length of services of board members and the guidelines they set for investment managers.
"It would be sad and wrong if boards decided to do something they thought was not in the best interests of shareholders just to avoid the hassle of disclosing non-compliance," he said. "If every answer could be found in a book there would be no need for boards.
"Boards should have the courage of their convictions and I would applaud those that are prepared to put themselves on the line to explain openly to shareholders why they do so."
However, he also warned that politicians and the FSA would take action if the industry did not quickly clean up its affairs.
He said: "I acknowledge that there are thousands of individuals in the industry who exhibit the highest ethical standards. Unfortunately, their worthy contribution is often undermined by the actions of the tiny few.
"It is time the good guys declared that six-digit salary figures are not the only things that motivate them. They could add that there is such a thing as society and that they are more than willing to play their part in ensuring a fairer one."