Stock market falls could still pose a risk to life assurance firms, the head of the UK's financial watchdog has told the BBC.

The chairman of the Financial Services Authority (FSA), Sir Howard Davies, said there could be no guarantee that firms would not be hit by tumbling share prices.

But he told BBC Radio 4's Today programme that the FSA was happy that most firms would be able to cope with further falls in the London stock market.

He also said that the FSA was looking into whether people who were mis-sold complex investment products called split-capital investment trusts should receive compensation.

Sir Howard surprised many people last month when he announced he was to step down from the FSA to become the new director of the London School of Economics.

He is due to take up his new position in October.

'No guarantee'

As life assurance companies hold many of their assets as shares, they have been badly hit by the declining stock markets of the past couple of years.

The FTSE 100 index of leading UK shares fell by a quarter last year to end at 3,940. It is down by about 43% from its December 1999 peak.

"The companies are currently meeting their solvency requirements," Sir Howard said.

"Down to 3,500 points does not seem to be a problem - many of them are happy down to 3,000.

"But of course one can never gave an absolute guarantee that there could be no failure. That will depend on what happens to stock markets."

UK life assurers were heavily invested in equities when the market began to fall from it speak.

Sir Howard said most firms had now adjusted their asset base and "have managed, in most cases, to trade through satisfactorily".

Split-cap compensation?

Sir Howard said investors who lost money through complex investment products, called split-capital investment trusts, may be able to get some compensation.

The FSA has been criticised for not taking prompt action over these funds, which were often marketed as a low-risk way of saving.

Sir Howard said that the FSA did not regulate split-cap funds directly, so its knowledge of them was limited.

But he said some of them had been sold through regulated firms "and sold to people for whom they were unsuitable".

"That is our responsibility and we are acting on that and we will be looking at enforcement action and looking for compensation," Sir Howard said.