UPDATE 2-UK's banks pay out less than half of swaps mis-selling pot

* 1.8 billion pounds so far paid out by banks

* Banks had set aside 4.4 billion pounds for compensation

* Lawyer says banks' provisions could be reduced

* Regulator sets March deadline for claims (Adds quote from lawyer on banks' provisions)

By Matt Scuffham

LONDON, Jan 29 (Reuters) - Britain's banks have paid outless than half of the 4.4 billion pounds ($6.7 billion) setaside to cover the mis-selling of complex interest rate hedgingproducts, according to data from the financial regulator.

The Financial Conduct Authority (FCA) ordered banks toreview nearly 30,000 cases in 2013 for possible mis-sellingafter finding serious failings in the way the products weresold.

The products were meant to protect smaller companies againstrising interest rates, but when rates fell the companies had topay extra charges, typically running to tens of thousands ofpounds. They also faced hefty penalties to extricate themselvesfrom the deals, which most said they were not aware of.

The FCA said on Thursday that banks had so far paid out 1.8billion pounds in compensation, and set a deadline for the endof March for claims. The sums set aside also covered the cost ofhaving to terminate agreements early and having to employ morethan 3,000 people to review the cases.

The scheme has drawn sharp criticism from lawmakers andbusinesses that believe it is loaded in favour of the banks. Ina parliamentary debate last December, lawmakers said it lackedtransparency, was inconsistent and did not give victims a properright of appeal.

Banks dismissed more than a third of the cases, withcustomers deemed sufficiently sophisticated to have understoodthe products. About half of those left in the review were thenoffered alternative products rather than cash compensation.

The mis-selling is one of a number of scandals involvingBritish banks in the past five years, ranging from the attemptedmanipulation of foreign exchange and benchmark interest rates tothe mis-selling of loan insurance.

Royal Bank of Scotland faced more claims than anyother bank in the scheme and has set aside 1.46 billion poundsfor compensation. Barclays set aside 1.34 billion pounds whileHSBC and Lloyds Banking Group have set asidehundreds of millions.

Barclays reduced the amount it had set aside forcompensation by 160 million pounds last October and banks willgive an update on their provisions alongside full-years resultsin February and March.

Alison Loveday, managing partner of law firm Berg, which isworking on cases of alleged swaps mis-selling, said other bankscould also reduce the amounts they have set aside.

"I don't think the banks are being held to task on this...Idon't think they ever thought they were going to have to paythem out and they haven't been forced to pay them so now they'rereleasing the money," Loveday said.

The FCA said 365 million pounds had been paid out to coverso-called consequential losses, which set the clock back to thepoint before the products were sold and require banks tocompensate beyond the direct losses that businesses havesuffered.

($1 = 0.6606 pounds) (Reporting by Matt Scuffham; Editing by Steve Slater and SusanThomas)