Panicking investors dumped shares in Aviva, Legal & General, Prudential on March 28 after the Financial Conduct Authority's head of supervision Clive Adamson was quoted in The Daily Telegraph as saying the regulator would investigate if those locked in pension pots had been treated fairly.
Investors feared insurers would face huge compensation bills, but the FCA clarified the terms of the review six hours after the stock market open, saying that sales practices would not be looked at, signalling a more benign undertaking by the regulator.
Simon Davis, a lawyer at Clifford Chance, was asked to look into how the FCA handled its announcement of the insurance review, said in his report that the strategy and the manner in which the Telegraph journalist was briefed was "high risk, poorly supervised and inadequately controlled".
The report, ordered by UK Finance Minister George Osborne, singled out Adamson, communications chief Zitah McMillan and head of markets David Lawton for failing to tell the watchdog's chief executive Martin Wheatley about the insurance market selloff in a timely way.
Adamson and McMillan are leaving the watchdog, while Lawton will stay on, the FCA said on Monday.
Wheatley's position appeared safe as the inquiry found he was "disadvantaged by the failures" of Adamson, Lawton and McMillan, and he should take credit for coordinating a public response, although this should have been faster.
The FCA said its has improved how it identifies, controls and releases price-sensitive information. "The board fully accepts Mr Davis' criticisms and on behalf of the FCA we apologise for the mistakes that were made", said FCA Chairman John Griffith-Jones.
The findings are a severe embarrassment for Wheatley and the regulator, which was only launched 18 months ago as a fresh start after its predecessor failed to spot the 2007-09 financial crisis.
The FCA said Adamson, Lawton, McMillan and Wheatley will not be paid a bonus for the 2013-14 financial year. The remaining five members of the regulator's board will see their bonuses cut by a quarter.