Victims of the Equitable Life near collapse should receive compensation, the Parliamentary Ombudsman ruled today.
In a report into how the government handled its oversight of Equitable Life, Ann Abraham found ten cases of maladministration over a decade and demanded a government apology.
The report entitled Equitable Life: a decade of regulatory failure took four years to produce and finds: "The public bodies responsible for the prudential regulation of insurance companies...and the government Actuary's Department failed for considerably longer than a decade to properly to exercise their regulatory functions in respect of Equitable Life."
Ms Abraham now recommends a compensation scheme be established to pay out on any financial losses which would not have been suffered had the victims invested elsewhere.
She calls for a compensation scheme to be established in six months and payouts to come in the following two years.
Estimates for compensation stand at as much as £4.5 billion.
Chancellor of the exchequer Alistair Darling will respond to the report after the summer parliamentary recess.
A Treasury spokesman said: "We are currently studying the report and the chancellor will give his view in the autumn."
George Osborne, Conservative shadow chancellor, said: "The ombudsman rightly highlights regulatory failings, including those between 1998 and 2001, when Gordon Brown and the Treasury had responsibility for this area.
"He cannot escape the blame for what happened on his watch."
However, he concurred with Ms Abraham that policyholders cannot expect to receive payments for the full losses suffered and any payment scheme must be consistent with sound public finances.
He added: It is up to the government now to admit its responsibility, issue the apology that the Ombudsman demands and create the payment scheme. If it doesnt, we will.
The Treasury is now set to respond to the report.
Equitable Life's near collapse in 2000 saw over one million policyholders see their pensions and savings cut in half and the insurer was forced to close to new business.
The firm fell into trouble when the House of Lords ruled in 2000 that it had to pay out on policy guarantees. However, Equitable Life did not have the funds to cover all the guarantees.