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By Huw Jones LONDON, Jan 10 (Reuters) - Britain cannot supervise foreignbank branches properly, making it harder to spot wrongdoing likeLibor rigging, the former head of the Financial ServicesAuthority said on Thursday. Branches, unlike subsidiaries, are mainly supervised by thebank's home regulator rather than the FSA, which must take aback seat on matters like capital requirements. Hector Sants, who stepped down as FSA CEO last June, told aUK parliamentary commission on banking standards that brancheswere a "significant problem", as shown by manipulation of theLondon Interbank Offered Rate or Libor benchmark. "The vast majority of the wrongdoing was done outside of thesupervisory net of the UK," Sants said. "These big branches inthe UK pose a significant threat to effective supervision." Libor setting was overseen in London by the British Bankers'Association with many non UK banks contributing. Libor rates,compiled from estimates submitted by large banks, are used todetermine interest rates on trillions of dollars of contractsaround the world. Sants was being quizzed just after the lawmakers grilledformer top officials at Swiss bank UBS, which lastmonth paid a $1.5 billion fine for rigging Libor. UBS, which has a substantial presence in London, paid a 160million pound fine to the FSA as part of the settlement. Sants defended the FSA's role in the Libor scandal, sayingit had acted swiftly in conjunction with U.S. regulators. "We took Libor very, very seriously," Sants said. Sants is due to take up the top compliance job at Barclays, the British bank that was first to settle charges ofrigging Libor, an interest rate used to price home loans, creditcards and other products worth over $300 trillion. He said it would be difficult for any regulator to spotmisconduct if it was not visible to the firm itself. Fiveinternal audits at UBS failed to spot the Libor rigging. In another case involving a subsidiary, the London branch ofU.S. bank JPMorgan was hit by a $6.2 billion loss aftertrades in credit derivatives went wrong. Sants said he would use his insights as a regulator toimprove culture and values at Barclays, something all firmsneeded to do. "Unless the firms put in place a radically differentapproach to compliance and a radically different set ofincentives, there is a very high risk it will come back roundagain," Sants said. Regulators should be able to suspend bankers suspected ofwrongdoing and ensure they are "struck off" if misconduct isproven, steps which would help change behaviour. Anyone who presided over a major failure at a bank shouldhave to prove they are "fit and proper" to stay in the industry,rather than the regulator having to do this, Sants said. Some of the traders mentioned in the Barclays and UBSsettlements were still "approved persons" under FSA rules -meaning they could work in the industry - the watchdog's head ofenforcement, Tracey McDermott confirmed to the hearing. Criminal investigations into individuals are continuing, shesaid, declining to elborate. The parliamentary commission is due to report around Marchand is expected to recommend changes to the law to help restoretrust in the tarnished banking sector.