Complaints against UK banks decline in first half - FCA

* Complaints fall 500,000 vs previous 6 months-watchdog

* Banks deal with 92 pct of complaints within 8 wks

* Some 51 percent of complaints upheld

* 2.55 bln stg paid out in compensation

By Matt Scuffham

LONDON, Oct 16 (Reuters) - Complaints against British banksfell sharply in the first half of the year and the sector dealtwith customer concerns more quickly, Britain's financialregulator said on Wednesday.

The findings show the banks grappling with scandals such asmis-sold payment protection insurance (PPI), whose bill industryexecutives fear could rise to 20 billion pounds ($32 billion),though the flow of customer complaints remains high.

The Financial Conduct Authority (FCA) said it received 2.9million complaints in the first half of 2013 - mainly about thebanks as opposed to other parts of the financial services sector- compared with 3.4 million in the previous six months.

Some 51 percent of complaints were upheld and 2.55 billionpounds was paid out in compensation, the regulator said, while92 percent of complaints were dealt with within eight weeks ofbeing made, the highest percentage since the regulator beganpublishing the data in 2006.

"We expect firms to put their customers at the heart oftheir business - an important part of this is the way theyhandle customer complaints," said FCA Chief Executive MartinWheatley.

Barclays received 370,733 gripes about itsservices, the most of any bank. However, that was down 11percent on the previous six months. The next highest was LloydsTSB, which received 253,735 complaints, although thatwas down 27 percent.

In total, 61 percent of complaints across the industryrelated to the mis-selling of insurance on loans and mortgages,known as payment protection insurance or PPI.

Banks have so far set aside 16 billion pounds to compensatecustomers mis-sold PPI in what is the most expensive consumerscandal ever in Britain.