UPDATE 1-UK considers changes to bank levy as proceeds fall short

* Change would see banks placed into different bands

* Government to consult on changes this month

* Regulator to review account number portability

* Critics say levy puts London at a disadvantage

* Levy rate has been raised seven times since 2011 (Adds government comments on competition, shares)

By Matt Scuffham

LONDON, March 19 (Reuters) - Britain is considering changesto its three-year-old bank levy after failing to raise as muchas expected from the tax, which some banks have said unfairlypenalises lenders with big overseas operations and those thatare not selling assets.

Britain introduced the tax in 2011 saying banks should make"a fair contribution" to the potential risks they pose to thefinancial system. The levy, which has never raised the targeted2.5 billion pounds ($4.1 billion) a year, applies to the globalbalance sheet assets of British banks as well as assetsbelonging to the UK operations of foreign banks.

In his annual budget statement on Wednesday, ChancellorGeorge Osborne said that the government would consult onpossible changes to the levy which would see banks put intodifferent bands with each band charged a set amount.

Osborne also outlined measures to improve competitionbetween banks including Britain's financial regulator launchinga review in September into the effectiveness of new rules meantto make it easier for customers to switch banks.

The Financial Conduct Authority will also study the costsand benefits of 'account number portability' which would enablecustomers to switch banks and keep the same account number.

In an effort to boost proceeds from its bank levy, thegovernment has raised the rate seven times since its launchbecause banks' downsizing meant there were fewer assets to tax.

Osborne said in December he would raise the levy rate againto 0.156 percent from 0.142 percent previously and widen itsscope.

Britain is expected to raise 2.3 billion pounds from thelevy this year, according to government data, compared with 1.6billion in each of the two previous years.

The Office for Budget Responsibility stuck to its forecastthat the government will raise 2.7 billion pounds in 2014/15 and2.9 billion in each of the four subsequent years.

HSBC, Europe's biggest bank, has been hardest hitby the levy, paying out $904 million last year, up $321 millionon the year before. HSBC said more than half its payment lastyear was on non-UK banking activity.

The Treasury will publish a consultation document on theissue on March 27 and any changes to the levy will not beimplemented before next year.

Critics say the levy is damaging London's standing as afinancial centre. Overseas banks with big London operations suchas JPMorgan and Goldman Sachs, pay sizeable sums.

"The UK is the only country hosting a leading financialcentre which has a bank levy...putting London at a disadvantagewhen competing for global banking business," said Peter Maybrey,banking tax partner at PricewaterhouseCoopers.

Shares in RBS closed down 1.3 percent, with HSBC 0.9percent lower and Lloyds down 0.8 percent. Barclays rose 2.4 percent.

($1 = 0.6034 British pounds) (Editing by Elaine Hardcastle)