By Sarah Toyne BBC News Online personal finance reporter

The City watchdog has announced it is backing troubled insurer Equitable Life and will not be asking for the firm to be wound up.

The outlook for policyholders would be more severe if the society were subject to... administration or provisional liquidation

FSA

The Financial Services Authority said that doing so "would not be in the best interests of policyholders".

There have been a growing number of calls for the firm to be wound up over the last week, and the regulator has received queries from policyholder action groups over its status.

The regulator admitted that "from time to time", as part of its contingency planning, it has considered what the implications of doing so would be, but it says the firm is not breaching regulatory requirements - and is still solvent.

It said that as long as Equitable's board continued to act fairly in the interests of policyholders - and even if the fund's value were to fall below its required minimum margin of solvency for regulatory purposes - any court procedure would not be in the best interests of policyholders.

Costly and uncertain

In a detailed explanation of its reasons, published on its website, it said any court proceedings, would create "uncertainty", and could lead to severe hardship for some policyholders.

It would also create "considerable worries and anxieties for policyholders" - and substantial legal costs would further deplete available assets.

Court procedures could also lead to a fall in payments to "very prudent levels", the regulator said.

Payments to annuitants would cease, long-term savings contracts would terminate, tax benefits would be lost and life insurance cover would expire, in one scenario outlined by the watchdog.

"Based on our analysis of the financial, tax, legal and accounting implications, the current outlook for policyholders would be more severe if the Society were subject to a formal court procedure such as administration or provisional liquidation, than continuing as a going concern under the stewardship of its Board of Directors," it said.

Pension cuts

The latest concerns over Equitable's financial position were sparked by its announcement that it was cutting its with-profits annuity policies by as much as 20% next year.

There have also been big concerns over its solvency, because in the last six months its free reserves have fallen from �1.1bn to �400m.

Equitable's problems came to light when it found it could no longer afford to pay long-standing policyholders the pension they had originally been promised when interest rates were higher.

The policyholders took the company to court when it tried to back out of its previous commitments.

Equitable Life lost the court battle and was left with huge legal bills, as well as being forced to pay the policyholders more than it said it could afford.

As a result, it was forced to close to new business in December 2000 and sold part of its business to Halifax bank - now part of HBOS - last year.

Further information:

The FSA's explanation can be found in section seven of its Q&A on Equitable Life, which can be found under the Consumer Help section on its website.