City regulator the Financial Services Authority (FSA) has been criticised in a report by MPs investigating its role in the Equitable Life affair.

The regulator has maintained that it could not have predicted a House of Lords ruling on guaranteed retirement incomes, which cost the life insurer so much it had to stopped selling policies.

But the treasury select committee said the peers' ruling was similar to an earlier judgement in the appeal court by Lord Justice Woolf, and so could have been predicted.

The FSA allowed Equitable to sell more than 20,000 policies after the judgement, without warning customers the life insurer might have to close.

'Risky'

Equitable lost its case over the payment of guaranteed pensions in the Court of Appeal in January 2000, a decision upheld by the House of Lords in July.

The company has admitted to selling 20,000 policies between the hearings.

The House of Lords ruling left Equitable with liabilities of at least �1.5bn, although the society was criticised for stating in its 2000 annual report that it only faced a bill of �50m.

The select committee criticised Equitable for its failure in 1993 to build up reserve funds to cover the cost of future liabilities as "risky".

MPs said the decision was "a crucial turning point" as Equitable was later told it must pay full bonuses to holders of guaranteed annuity rates (GAR).

The FSA is also carrying out its own inquiry, which MPs want to focus on the role of regulators in the lead-up to the crisis, including the Department of Trade and Industry (DTI), which regulated Equitable until 1998.

The treasury committee said it was "unclear" why the issue of GAR liabilities was never addressed by the DTI during the mid 1990s.

It said it wanted that issue "pursued closely" in future investigations.

Equitable was put on a firmer footing earlier this year when Halifax agreed a �1bn deal for the pension group' assets.

But an agreement is still being sought with the 90,000 holders of Equitable GAR policies.

GAR policyholders had been promised guaranteed rates on future pensions but these became expensive to honour when interest rates fell in the 1990s.

Equitable tried to get round this by reducing the final bonuses it paid out, but subsequently lost the House of Lords case.