A damning report accuses the government and the Financial Services Authority of maladministration and of failing to regulate the Equitable Life Assurance Society has called for thousands of policyholders to be compensated.

A damning report that accuses the government and the Financial Services Authority of 10 charges of maladministration and of failing for more than a decade to regulate the Equitable Life Assurance Society has called for hundreds of thousands of policyholders to be compensated.

The long-awaited report from the Parliamentary Ombudsman, Ann Abraham, said that the government ought to apologise to people who lost funds in the Equitable Life debacle for the "injustice" they suffered and for the "passive, reactive and complacent" manner in which the Society was regulated.

The 2800-page document, which took four years to compile, was presented to parliament last night with a call for a compensation scheme to be established in short order to make good the losses that individual investors suffered as a result of the problems at Equitable. Full compensation would cost the government around £4.6bn for the estimated one million policies held with the troubled mutual society.

The action group for Equitable investors said the report was a "devastating indictment of the actions of the UK regulators over an entire decade" while shadow chancellor George Osborne promised that if the current government did not compensate policyholders, a Conservative one would.

Ms Abraham said the scheme should be set up within six months of the Government and Parliament agreeing to do so, and should aim to complete its work within two years. She said that policyholders cannot expect to receive payments for full losses and that each case would have to be individually assessed.

The Ombudsman's report is widely seen to be the last chance for policyholders, a great many of them Scots, to get compensation after previous reports were either ignored by the Government or failed to find sufficient fault with the regulators. The current investigation is the last in a long line of investigations into the mismanagement of Equitable Life and comes after Equitable abandoned its £3.3bn legal action against its former auditor Ernst & Young and settled with its 15 former directors, whom it had been pursuing for £2.6bn.

Ms Abraham said she found evidence of "serial regulatory failure" for more than a decade. She said the former Department of Trade and Industry (DTI) and the Government Actuary's Department (GAD) were "passive, reactive and complacent" in their regulation of the society before July 1998.

She added that between July 1998 and December 2000, the regulators' actions were "largely ineffective and often inappropriate" despite them being aware of the society's growing problems. Overall, she identified 10 instances of maladministration by the DTI, GAD and the Financial Services Authority in the period leading up to December, 2001.

Officials at the Ombudsman's office said the crucial failure had come in May, 1999, when the FSA permitted a financial re-insurance arrangement at Equitable Life, reputed to be worth £809m, but which was actually worthless. Before and after that date there were a series of failures which resulted in a crisis for the society and led it to close to new customers.

Paul Braithwaite, of the Equitable Members' Action Group, said: "The UK regulators were fully aware for a decade that Equitable Life was effectively insolvent, yet they allowed the company to suck in another £20bn in pension contributions from more than a million new investors."