The Treasury Select Committee said the Financial Services Authority (FSA) was not providing a robust enough framework to manage conflicts of interest relating to so-called inherited estates — surplus money built up in funds over decades.

Consumer groups have long argued the money should be returned to policyholders.

The committee agreed it was “inappropriate” for firms to pay mis-selling compensation out of the inherited estate.

It said the FSA’s regulation of whether shareholders’ tax should be paid with the money was “barmy”.

However, it said funds could be used to smooth returns for policyholders between good and bad years.

Clare Spottiswoode, policyholder advocate at Norwich Union, welcomed the report as “a giant leap forward in bringing clarity”.

Norwich Union said it supported the committee’s call for greater transparency and remained optimistic it would be able to conclude talks on its £5.2billion inherited estate “in the next few weeks”.