Mr Darling claimed the Personal Investment Authority had backed away from its earlier policy in the face of pressure from specialist insurers who would otherwise have been forced to foot the bill.
"This is a prime example of where self-regulation of financial services does not work," he said. "The regulator is forced to negotiate with a tied interest and is not able to do it properly.
"The insurance industry must realise that public confidence in it will be further undermined by such behaviour." Mr Darling said he would raise the issue last night in the House of Commons debate on the Finance Bill.
His comments follow a decision by the financial regulator to amend the wording of letters to be sent to savers who may have been wrongly advised to set up private pensions.
After a nine-month boycott from up to 2,000 independent financial advisers and the refusal of indemnity insurers to pick up the tab for any redress to transfer victims, the PIA finally agreed to delete any reference to compensation from the letters.
Its cave-in has been condemned by the Consumers Association as potentially stopping tens of thousands of people from claiming a review of their pensions. But the Treasury backed the PIA, claiming the decision would break the log-jam and lead to an early review of the most urgent cases.
One mutually owned indemnity insurer, LIBM, also supported the deal, although it argued that the matter should have been resolved months ago.Reuse content