Up to a million long-suffering Equitable Life policyholders appeared to be a step closer to receiving compensation last night after the European Parliament ruled that the British Government had failed to comply with European Union insurance law.

A report by Diana Wallis, a Liberal Democrat, was backed by more than 600 of her fellow MEPs, who were scathing about the actions of both the Treasury and the now-disbanded Department for Trade and Industry in the run-up to Equitable’s near-collapse in 2000.

The government departments were responsible for regulating Europe’s oldest mutual insurer in the years before a House of Lords ruling that it must honour guarantees contained within some of its annuity products.

Ms Wallis’s report blamed the Government for failing to ensure that Equitable Life had sufficient reserves to meet its policyholder obligations. It called on Britain to assist “victims” of Equitable’s problems and recommended wide-ranging changes to EU financial services rules. While yesterday’s vote is not binding, it puts pressure on the Government before a report into Equitable Life by Ann Abraham, the UK Parliamentary Ombudsman, expected later this year.

Charlie McCreevy, the European Commissioner for Internal Markets, was handed a copy of the report yesterday. European Parliament officials said that the Commission had the power to force the Government to compensate Equitable’s policyholders if it found that it had not properly implement insurance directives.

The Treasury said that this was not its understanding of the situation. It said: “It would not be appropriate for the Government to comment on the substantive findings made in the report, pending the outcome of the UK Parliamentary Ombudsman’s investigation into the regulation of Equitable Life.” Equitable Life welcomed the report but said that the Ombudsman represented policyholders’ best chance.

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