The fine follows the discovery of gross inadequacies in record-keeping by the society's home life and pensions sales- force.
Liverpool Victoria has long prided itself on supporting low-income savers who traditionally get short shrift from the established financial institutions.
Roy Hurley, the chief executive, yesterday took the highly unusual step of apologising to members for the lapse. He emphasised that the problems that led to the fine were largely historical, and that since the irregularities came to light in September 1997 the sales team had been radically restructured. Only one-fifth of the sales -force are still with the firm.
The group has recruited the PIA's former head of investigations, David Nichols, as a new head of compliance and has completely overhauled its compliance procedures.
"This has been a difficult and painful period for the Liverpool Victoria group," said Mr Hurley. "The board believes that today's PIA announcement draws a line under the group's historical problems."
The society is now trying to establish on what basis to compensate the 50,000 members it believes to have been affected by the lapses. Some of these cases go back to 1988. They are typically investors who contributed as little as pounds 5 a month to the society's 10-year endowment policies.
Many of them were on extremely low incomes and had no bank or building society accounts at all. They can expect to receive average payouts of about pounds 200.
The PIA said that because of the society's failure to keep adequate records, it was impossible to determine whether these products were suitable for the people to whom they had been sold, or whether the sales -force were properly qualified to sell the products they did.
"The fine is as high as it is because the failures were so widespread and fundamental," a PIA spokeswoman said.
Liverpool Victoria is now having to reassess how it serves this market sector in the light of the PIA ruling.
The group's marketing director, David Conway, said yesterday that the society was looking at how it could meet the PIA's compliance standards while maintaining door-to-door collections, without which many members would not have bothered to save.