The Norwich and Peterborough Building Society (N&P) will repay its customers who lost money when Keydata collapsed.
The investment firm was closed by the Financial Services Authority in 2009, with 30,000 UK investors facing the loss of £450m.
N&P advisers sold policies to 3,200 customers and all will now receive their capital plus interest.
The payments will replace compensation being offered to some through the official financial services safety net.
The move will cost N&P £57m, more than 10 times the pre-tax profit of £5.1m it made in 2010.
The Keydata collapse was the biggest investment failure the Financial Services Compensation Scheme (FSCS) has dealt with. Those being compensated had primarily bought investments which Keydata had sold on behalf of a Luxembourg investment firm called Lifemark.
Some 19,000 people were told they could apply to the FSCS for payments to compensate them for the now worthless investments.
These claims are currently being processed, with payouts being made up to the FSCS limit of £50,000 per person.
However, the N&P has now said that all of its 3,200 customers who were sold any Keydata policies will receive payments through its own compensation scheme.
"The society has been deeply concerned for its customers who have suffered following Keydata's failure and is very sorry for the hardship and anxiety that has occurred," said chairman Gordon Horsfield.
N&P will pay 3,200 customers for their policies, and so the society will get any benefit if the investments rebound at all. It has earmarked £57m to buy the policies, pay customers, and pay legal fees.
Customers will receive a letter from N&P explaining the situation in the next few days.
A spokeswoman for the building society said each customer would eventually be sent an additional individual summary letter specifically outlining the payment that they were due.
This would cover the capital they invested plus interest. Any N&P customers who had already received payment from the FSCS would see that covered by N&P, which would then pay the additional amount due to the customer.
The spokeswoman did not give a timeframe, but apologised and said the process was complex and could take some time.
She said N&P was the only adviser to be making these direct payments to customers.
Policies were sold to customers by advisers in N&P branches in East Anglia and Lincolnshire.
The collapse of Keydata prompted an outcry from N&P customers who had made investments, with many planning to sue.
The decision by N&P to pay them all back in full is expected to stave off this legal threat.
In January, the building society's Matthew Bullock announced that he was to retire at the end of March. He had been at the helm of the society for 12 years, but had spent most of 2010 trying to placate angry savers who claimed they were misled by the society's investment advisers into buying the policies provided by Keydata.
Mike Hounsell, marketing and sales director, has resigned and left at the end of February.
N&P reported pre-tax profits - before Keydata provision was factored in - of £5.1m in 2010. It is currently in merger talks with the Yorkshire Building Society.