The City regulator is 'incapable' of acting quickly to protect the UK's investment trust sector from overseas predators, a leading peer has warned.

It comes as seven London-listed trusts face a showdown with US hedge fund Saba Capital, which aims to oust their boards and replace them with its own nominees, saying leaders have 'failed shareholders' and made poor decisions.

Baroness Sharon Bowles, a Liberal Democrat peer and board member of the London Stock Exchange, told The Mail on Sunday that the corporate raid on the investment trust industry had been encouraged by the Financial Conduct Authority (FCA) being too slow to respond to problems in the sector, causing trust share prices to suffer, making them prime targets for takeover swoops.

She highlighted leftover EU rules that had made it seem more costly to invest in UK trusts than was the case. This double counting, revealed by The Mail on Sunday last year, has discouraged savers from turning to investment trusts, depressing their share prices.

Action to resolve the issue was promised by Labour and the FCA last year, but only after a campaign by the industry, and has still not been fully implemented.

'I think the slowness of response by the authorities to the cost issue and their lack of understanding going right to the top has led to Saba's campaign and it will be the end game for more investment trusts unless they take fast action now,' Bowles said.

'Also the FCA just seems incapable of any kind of enforcement action to make changes happen.'

Saba Capital, run by Wall Street financier Boaz Weinstein, has stakes in each firm ranging from 19 to 29 per cent and needs to win 50 per cent support from voting shareholders to succeed. As a result, it will win if other investors do not actively vote against the proposals.

The situation has seen the heads of the seven trusts call on small investors to exercise their right to vote and oppose Saba's plans.

John Baron, a former member of the Treasury Committee who holds shares in the trusts, raised concerns about Saba's ability under current rules to take control of the businesses without securing the support of a majority of investors. 'This David and Goliath contest brings into question shareholder democracy,' he said. 

He called for efforts to 'galvanise' retail investors and for the FCA to investigate whether small shareholders were properly informed of their rights ahead of the votes called by Saba.

It followed a letter from the Association of Investment Companies urging the FCA to change rules so all investors automatically hear of plans to change investment trust strategy or their leadership.