More than a million people who lost savings in the Equitable Life crisis should be compensated by the Government because of a “decade of regulatory failure”, a watchdog concludes today.

Ann Abraham, the Parliamentary Ombudsman, accuses the Government and three financial regulators of complacency and serial maladministration that led to losses for Equitable customers estimated at more than £4 billion.

Her damning report calls for a compensation scheme to be set up within six months and demands that the bodies responsible publicly apologise.

George Osborne, the Shadow Chancellor, turned up the pressure on the Government to provide financial redress for those wronged, committing a future Tory administration to compensating policyholders.

“It is up to the Government now to admit its responsibility, issue the apology that the Ombudsman demands and create the payment scheme,” Mr Osborne said. “If it doesn’t, we will.”

In response to today’s report, the Treasury will tell policyholders - some of whom lost their life savings when Equitable was brought to its knees eight years ago - that they must wait until the autumn to learn if they are to receive payouts.

Policyholders lost their savings after Equitable was forced to close its doors to new business in December 2000, having found itself on the point of insolvency. Despite compelling evidence that Europe’s oldest mutual insurer was facing serious financial difficulty, neither the Department of Trade and Industry, the Government Actuary’s Department (GAD) nor the Financial Services Authority took adequate steps to protect policyholders, Ms Abraham says. Once they became aware of Equitable’s difficulties, actions by the regulator were “largely ineffective and often inappropriate”, she adds.

In the long-delayed report, Ms Abraham describes the policing of Equitable as a “decade of regulatory failure” and finds the government bodies guilty on ten counts of “maladministration”, or failing to carry out their duties properly. Central to the report’s findings are that Equitable told regulators in filings over many years that it was facing financial strain, but no action was taken. Regulators also allowed the society to make bonus payments to customers that it could ill-afford, Ms Abraham found.

It also allowed Roy Ranson, Equitable’s chief executive, to act simultaneously as the firm’s chief actuary, making it far less likely that he would act in his capacity as whistle-blower.

Today’s report makes it more likely that Equitable Life policyholders will receive compensation, although two previous court actions to force payouts failed. Vanni Treves, Equitable’s nonexecutive chairman, said: “It’s a damning report. On behalf of policyholders, it is all that could be reasonably expected. It sets out a catalogue of failures.” Mr Treves said there was “no question” that the near-collapse of Equitable could have been prevented by regulators.

“Our policyholders are dying at the rate of 15 a day and 30,000 have died since we started our work. This mustn’t go on,” he said.

Paul Braithwaite, who runs the Equitable Members Action Group, which has campaigned for compensation, said: “I think it’s a fantastic piece of work, and absolutely heart-warming for very large numbers of aggrieved investors who felt that they were failed by regulators. I think it’s nigh unthinkable that a report that is this damning from Parliament’s own ombudsman can be ignored.”

Ros Altmann, an independent pensions policy adviser, said that the report was “extremely strong”. She said: “It is vital for our democracy and for our financial services industry that, where the Government is responsible for failures, it at the very least offers an apology and determines how it will make sure the mistake is not repeated.”

Neither the Treasury nor the FSA was prepared to comment immediately on the findings.

‘My mistake was to trust that it was a quality company’

Case study

Alan Bevan said the mistake he made was in believing the accepted wisdom that Equitable Life was a “quality company” (writes Ben Quinn). He and his wife, both self-employed, committed close to 90 per cent of their savings in the 1990s, believing that it would ensure a comfortable retirement.

Mr Bevan, 60, from Buckinghamshire, invested more money as the software company in which he was a partner developed. Nothing prepared them for the shock of the near-collapse of Equitable Life, which has ended up costing the couple more than £100,000. He said: “The financial cost has been massive and we were left immensely insecure, but the mental stress has also had a major impact. Having said that, my wife and I were in our early fifties and looking back now, we were lucky that we were both working, had reasonable jobs and were able to repair the damage. I feel so sorry for the victims who were past retirement age.”

He feels that Ann Abraham’s report is a positive step but admits “a huge amount of cynicism” about what the Government will do - given the experience of workers who lost out from occupational pension schemes being wound up.

Risk factor

1762 - Equitable Life is founded

1957 Starts selling guaranteed annuity rate policies (GARs)

1988 Stops selling GARs as they become too expensive to honour

1994 Cuts the size of final bonuses paid to its 90,000 policyholders

2000 House of Lords rules it must meet its obligations, leaving it with a £1.5 billion liability. The mutual puts itself up for sale, but fails to find a buyer. It closes its doors to new business

2001-04 Three reports place blame largely on Equitable's management

2004 Penrose report also highlights regulatory failings

2007 European Parliament calls for government compensation for policyholders

July 2008 Parliamentary Ombudsman finds “serial regulatory failure” by the Government, recommends compensation fund