* Swiss competition body opens probe into eight banks on FX
* "Evidence exists that banks colluded" on FX rates -WEKO
* UK FCA to assess if banks have cut benchmark rigging risk
* FX market could take years to recover - industry chief (Adds details from UK financial watchdog)
By Caroline Copley and Patrick Graham
ZURICH/LONDON, March 31 (Reuters) - Swiss and Britishregulators stepped up their scrutiny of alleged manipulation offoreign exchange markets on Monday, as watchdogs take a closerlook at whether banks have a tight enough grip on the behaviourof their traders.
Switzerland's competition commission WEKO said it opened aninvestigation into several Swiss, British and U.S. banks overpotential collusion to manipulate currency rates.
The UK Financial Conduct Authority (FCA), meanwhile, said itwill assess if banks have cut the risk of traders manipulatingbenchmark rates in the coming year, to see if lessons have beenlearned from the scandal over benchmark rate rigging.
WEKO said it is investigating UBS, Credit Suisse, Zuercher Kantonalbank (ZKB), Julius Baer,JP Morgan, Citigroup, Barclays and RoyalBank of Scotland.
"Evidence exists that these banks colluded to manipulateexchange rates in foreign currency trades," WEKO said, adding itassumed the most important exchange rates were affected.
Regulators around the world are looking closely at traders'behaviour on a number of key benchmarks, spanning interestrates, foreign exchange and commodities markets.
Eight financial firms have already been fined billions ofdollars by U.S. and European regulators in the past two yearsfor manipulating benchmark interest rates and several more arebeing investigated.
The probe into currency trading could be even more costly.Authorities in the United States, Britain, Switzerland, Germanyand Singapore are looking into allegations of collusion andmanipulation by traders at major banks of the largelyunregulated $5.3 trillion-a-day foreign exchange market.
"Even if there is no further alleged wrongdoing, the currentconcerns will take years to work out," said Marshall Bailey,head of the ACI Financial Markets Association, the sector's maininternational umbrella organisation.
Credit Suisse said it was "astonished" to be drawn into sucha probe after not being subject to a preliminary investigationlast year. It said WEKO's statement contained incorrectreferences to Credit Suisse which were "inappropriate andharmful" to its reputation.
SELF-REGULATION MODEL
Aside from the fines, banks fear that the response to therow from international regulators and politicians will put anend to the self-regulation model the sector has championed fordecades and, in the process, raise the cost of foreign exchangedealing for banks, companies and individuals.
WEKO said it was in touch with some internationalauthorities but had not been prompted by a foreign authority toopen the investigation. "We have to conduct the investigationourselves. There's no legal basis at the moment to exchange datadirectly with foreign authorities," WEKO Director Rafael Corazzatold Reuters.
WEKO opened a preliminary investigation last October afterlearning about potential manipulation of foreign exchangemarkets.
Julius Baer said an internal investigation had found noevidence of foreign exchange market abuse. ZuercherKantonalbank, Switzerland's biggest regional bank, said it wouldcooperate with authorities.
RBS said it would co-operate with any investigation, butdeclined further comment. UBS, JP Morgan, Barclays and Citi alldeclined to comment.
WEKO Vice Director Olivier Schaller said the WEKOinvestigation would take months and could result in fines of upto 10 percent of the turnover generated in the relevant marketin Switzerland over the last three years.
UBS last week suspended up to six FX traders, bringing thetotal number of traders suspended, placed on leave or fired toaround 30.
The Swiss National Bank (SNB) last year estimated the dailyturnover in foreign exchange markets of 25 sizeable banks inSwitzerland amounted to $216 billion.
London dominates foreign exchange trading, accounting for40.9 percent of global turnover last year, compared with 18.9percent in the United States and 3.2 percent in Switzerland,according to Bank of International Settlements (BIS) data.
The FCA said it will also look at whether investment banksare handling potential conflicts of interest adequately andensuring so-called "Chinese walls" are strong enough - toprevent confidential information received in one part of thebusiness not being abused by a different part of the business. (Additional reporting by Steve Slater, Silke Koltrowitz, OliverHirt, Rupert Pretterklieber and Anirban Nag; Editing by JaneMerriman and David Holmes)