UPDATE 1-UK banks ditching fintech, foreign customers to cut costs

(Adds details from report)

By Huw Jones

LONDON, May 24 (Reuters) - Banks are ditching customers suchas financial technology firms and foreign nationals to cut thecost of complying with tougher capital and anti-money launderingrules, an independent study for Britain's markets watchdog saidon Tuesday.

The Financial Conduct Authority (FCA), which commissionedthe 73-page study of how banks were lowering their risk, warnedlenders on Tuesday they could fall foul of competition law ifthey refuse new business or close accounts without good reason.

Banks have faced a welter of new regulation since thefinancial crisis, burdening them with new costs and making themmore cautious. Lenders have also been fined hefty sums forbreaching anti money-laundering rules.

The study from John Howell & Co found it costs 1-2 pounds ($1.45-$2.90) to check new customers, rising to 100 pounds ifcloser scrutiny is required, while external intelligence reportsrun into thousands of pounds.

"As a result, many banks have undertaken a strategic reviewof their business and functions, often choosing to focus ontheir 'core' business," the study said.

Two large, unnamed British banks are together closing around1,000 personal and 600 business accounts a month to curb risks,the study said.

Foreign diplomats, students and businesses are all findingit harder to retain UK-based accounts, or to carry out a fullrange of banking across currencies and jurisdictions, it added.

Banks have little appetite to pass on some of the highercompliance costs to customers in what the study calls a "marketfailure".

Some banks are closing accounts for money transmissionservices, pawnbrokers, fintech companies, and charitiesoperating in countries or regions seen as presenting greatermoney laundering and terrorist financing risks, it added.

Britain accounts for half of European fintech start-ups,which use technology from cloud data storage to smartphones toprovide loans, insurance and payment services.

But banks and investors have grown more cautious about thesector because of poorly understood business models andstill-evolving regulation systems, the study said.

This is likely to worry the British government which isencouraging growth in the sector to avoid losing ground to rivalcentres like the United States and Australia.

Some banks spoke of "challenges" in trade-related finance,vital for greasing the wheels of the global economy.

Smaller companies working in the defence sector were alsofinding it hard to obtain banking services, but the BritishBankers' Association was helping to improve access.

The FCA said it will work with banks to better identifymoney laundering risks, boost innovation to cut compliancecosts, and encourage better communication between banks andcustomers.($1 = 0.6850 pounds) (Reporting by Huw Jones, editing by Carolyn Cohn and AdrianCroft)