Government dashes hopes of Equitable Life compensation

Equitable Life policyholders had their hopes of a bail-out from the taxpayer dashed by the Government yesterday as it laid the blame for the insurer's near-collapse firmly on its former directors and the Conservatives.

Drawing on the findings of the long-awaited Penrose report into the demise of the insurer, published yesterday, Ruth Kelly, Financial Secretary to the Treasury, said there was no case for the Government to pay compensation. "[Lord Penrose] makes no allegation of maladministration nor of negligence against the regulator," she said.

Equitable, the oldest and once the most venerated of insurance companies, has teetered on the brink of insolvency for four years after being forced to honour guarantees it had promised policyholders. The company has closed to new business and policyholders have endured swingeing cuts to their retirement savings.

Policyholders were defiant about the report's findings. "By rejecting the moral case for compensation, the Government is ensuring that we will have to fight them through the courts. Its interpretation of the report's findings was highly selective and the Government will not be able to wriggle out of its obligations so easily," Paul Weir, a policyholder, said yesterday.

Lord Penrose's report has revealed that Equitable's directors overpaid bonuses to customers for more than a decade, putting the company £4.4bn in the red by mid-July 2001. Lord Penrose found that the directors failed to inform policyholders of the risks the company was taking, and withheld information about its position from the regulators.

"The first and most significant failure lay at the heart of the society. Critical responsibilities for valuing liabilities and assessing risk were not subject to effective scrutiny. The society was the author of its own misfortunes," the report said.

But the watchdogs ­ the Department of Trade and Industry, the Treasury and the Financial Services Authority ­ were also blamed. "The regulatory system ... has failed policyholders. It was not kept up-to-date and operated in an inefficient manner," the report said. Ms Kelly said the regulatory system was a product of the previous Conservative government and was being overhauled.

But MPs said the Government was trying to whitewash and distort the findings of the report. "The Government has a clear moral obligation to take the matter further. It ignores the specific criticisms of government regulation," Vincent Cable, the Liberal Democrat Treasury spokesman, said.

Ms Kelly also announced the launch of an inquiry into the way mutual life insurers are run. She said that there was an appalling lack of knowledge among board directors and that the Government would try to improve the scrutiny of senior management.