UPDATE 1-Swiss bank UBS says it has started FX settlement talks

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ZURICH, Sept 29 (Reuters) - Switzerland's UBS hasbegun settlement talks over allegations it was involved inmanipulating foreign exchange rates, the bank said, and warnedthat it could face a material penalty in any deal struck.

The terms proposed in the talks included findings that UBSdid not have adequate controls over its foreign exchangebusiness, it said in a share-swap prospectus published onMonday.

UBS, Switzerland's largest bank, did not identify theregulator concerned but the prospectus said that otherinvestigating authorities could also start settlement talks inthe near future. A spokesman for the company declined toelaborate beyond what was said in the prospectus.

However, sources told Reuters on Friday that Britain'sFinancial Conduct Authority (FCA) was talking to UBS and fiveother banks - Barclays, HSBC, Royal Bank ofScotland, JP Morgan and Citi - about apossible settlement that could results in each bank being finedhundreds of millions of pounds.

The banks are expected to be fined different amounts,depending on the gravity of the alleged misconduct, the sourcessaid.

As well as the FCA, authorities in the United States,Switzerland and Hong Kong are investigating the $5.3 trillion aday foreign exchange market.

Reuters reported this month that banks were pushing for acoordinated settlement with the FCA, which was on track to bereached by the end of the year.

The maximum potential fine for one bank was put forward atbetween 300 million pounds ($487.11 million) and 400 millionpounds, with the others pegged below 300 million pounds, onesource familiar with the matter said.

The FCA launched an investigation last October intoallegations that bank traders used advance knowledge of clientorders to try to manipulate foreign exchange benchmarks.

In recent months the investigation has focused on laxinternal compliance, oversight failures and market conductbreaches by individual employees rather than deliberatemanipulation of the market, sources have told Reuters.

More than 30 traders from various banks have been put onleave, suspended or fired. No individual or bank has beenformally accused of any wrongdoing.(1 US dollar = 0.6159 British pound) (Reporting by Joshua Franklin; Additional reporting by CarmelCrimmins; Editing by David Goodman)