HUNDREDS of thousands of customers who lost money in the Equitable Life crisis had their hopes of compensation dashed by the Government last night.

They had hoped a damning report in the financial fiasco would prompt ministers to help the worst affected.

Policyholders who have seen their pensions wiped out in the collapse believed they were owed compensation because official regulators failed to spot the warning signs until it was too late.

But the report found that while the regulatory system had failed policyholders, the society's problems stemmed from its management.

Equitable Life has been plunged into crisis because it sold thousands of policies with guaranteed returns that were based on unrealistically high interest rates.

When inflation plunged to an all-time low, the company found itself locked into expensive policies it could not afford to honour.

It tried to renege on the guaranteed payouts in an attempt to protect its other customers, but the House of Lords ruled that in doing so it had mistreated the 90,000 guaranteed policyholders.

Faced with debts of £1.5bn the mutual closed its doors to new business in December 2000.

As a result more than 800,000 policyholders are facing financial catastrophe.

But last night, Financial Secretary to the Treasury Ruth Kelly ruled out compensation after a report found the society was the "author of its own misfortunes".

The inquiry, by Scottish judge Lord Penrose, did not find policyholders had suffered loss as the result of the regulatory system.

Ms Kelly turned her fire on Equitable's senior management saying the report had found "a culture of manipulation and concealment on the part of some of the company's previous senior management allowed a bonus policy to develop that led to the society's financial weakening - a policy left unchecked by its own board".

She added that Roy Ranson, chief executive and actuary of the company between 1991 and 1997, had failed to provide the board with pertinent information.

Lord Penrose said the board failed to get fully to grips with the financial situation faced by the society, while the collective skills of its members were inadequate.

He added that non-executive directors were wholly dependent on input from Mr Ranson and they were largely incapable of exercising any influence on the management of the society.

Equitable was regulated by the Department of Trade and Industry (DTI) until 1998, when it was taken over by the Treasury. The following year regulation was handed over to the Financial Services Authority (FSA).

Lord Penrose said there was a lack of co-ordination between the types of regulation.

Ms Kelly told the Commons: "We cannot underwrite each and every company whose management and boards make fundamental mistakes and questionable decisions."

But she added that the Serious Fraud Office, DTI and FSA were all still considering whether to take further action in the light of the report.

Policyholders' best hope for compensation now lie with Parliamentary Ombudsman Ann Abraham reopening her investigation in the light of the report's findings.

Equitable is suing its former directors for £3.2bn and its former auditors, Ernst and Young, for £2.6bn.

Paul Braithwaite, a spokesman for the Equitable Members' Action Group, said that while the Treasury expressed sympathy for policyholders it was indifferent to their plight.

Equitable chief executive Charles Thomson, said: "In the last three years, the society's board has done a great deal to stabilise the business. The society is solvent."