By Stephen Mulvey
EU reporter, BBC News
Regulators are accused of being in awe of Equitable Life
A European Parliament committee probing the scandal of insurer Equitable Life has urged Britain to compensate policyholders who lost savings.
The committee's damning report says the UK government bears responsibility, because it did not comply with EU law that would have protected them.
Equitable Life slashed policyholders' savings or pensions when it nearly collapsed in 2000.
More than a million were hit in the UK, 8,000 in Ireland and 4,000 in Germany.
The MEPs criticise the UK Financial Ombudsman Service for "serious shortcomings" in its operation.
They also condemn UK ministers and regulators who failed to give evidence.
The committee was set up after policyholders petitioned the European Parliament for help.
Members of the committee said they hoped their report would form a "pincer action" together with a forthcoming second report from the UK Parliamentary Ombudsman and strengthen victims' case for redress.
The report says the UK failed to properly transpose the EU Third Life Directive into UK law, and that the mistakes were compounded by a "weak regulatory environment".
The regulators showed "excessive leniency" towards Equitable's solvency margin and "undue 'awe' or 'deference'" towards the company, apparently believing it to be "'too good and too reputable' to make mistakes", the report says.
DECLINED TO ATTEND
Des Browne (UK defence secretary, former Treasury financial secretary)
Ed Balls (economic secretary to Treasury)
Callum McCarthy (chairman of Financial Services Authority)
Sir Howard Davies (ex-FSA chairman)
The committee also draws attention to the difficulties policyholders faced getting information or making complaints.
There was a "pattern of confusion and much inequality of treatment" in the UK, it concludes.
"Although the FOS [Financial Ombudsman Service] can be considered as one of the more advanced out-of-court dispute settlement schemes in Europe... the Equitable Life case has revealed a number of serious shortcomings in its operation," the report says.
"The committee therefore urges that the UK government urgently addresses these shortcomings, strengthens the FOS's capacities and ensures that it is truly independent from the FSA [Financial Services Authority], and from the government itself."
Overall, the report challenges one of the conclusions of a 2004 report by Lord Penrose into the near-collapse of Equitable, that regulatory system failures were secondary factors.
The committee also criticises the EU's Third Life Directive itself, accusing it of leaving the powers and responsibilities of different national authorities poorly defined.
"If you were Irish or Dutch or German or had bought a policy outside the UK you had no-one you could go to," said British MEP Sir Robert Atkins.
Authorities outside the UK said it was a matter for the UK regulator, he said, but the UK regulator was not interested in people calling from abroad.
British MEP Diana Wallis, who drafted the report, said the saga showed that the European Commission needed to do more to ensure that EU directives were properly implemented.
Labour members of the committee tried but failed to water down the criticism of the UK government.
There is no further opportunity to amend the report, though it can still be rejected by the full parliament in June.