* Bulk of fines now go to government coffers
* Libor rigging enforcement costs to peak this year
* Lawyers warn higher fees will be passed on to customers
By Huw Jones
LONDON, April 9 (Reuters) - British banks could pay up to a quarter more to be supervised as two new watchdogs adopt more intrusive regulation and impose higher fines which will be paid into the coffers of cash-strapped government.
The defunct Financial Services Authority (FSA), scrapped in March to correct supervisory failures uncovered by the financial crisis, used to keep fines to subsidise its own operating costs.
The new Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) will now levy between them nearly 650 million pounds for the financial year that began this month, up 15 percent on last year's FSA budget.
A company being supervised by both new regulators will pay 24 percent more in fees compared with the old regime, the PRA said.
Banks contacted by Reuters declined to comment on the rise.
Lawyers said the fee hikes will inevitably be passed on to customers and shareholders of the firms being supervised.
"A 15 per cent increase in fees betokens at least an increase in regulatory vigour," said Simon Morris of lawfirm CMS Cameron McKenna. "The new regulators mean business and the heightened price tag warns the market of what is coming."
The FCA will supervise conduct of staff at 26,000 financial firms, while the PRA will ensure that 1,700 banks, insurers, building societies and big investment firms hold enough capital.
The hike covers transition costs, including set-up expenses of 12.6 million pounds a year for the PRA, while the costs of pursuing banks for rigging the London Interbank Offered Rate (Libor), the highest profile regulatory action, will jump 13.5 million pounds this year, though reaching their peak.
Money collected from fines, which have reached record levels in recent years as the FSA cracked down on misconduct, will be handed to the UK Treasury, minus enforcement costs.
The FSA collected 382 million pounds in fines in its final year.
"The Treasury's raid destroys one of the pillars of UK financial regulation, which is that fining policy is fiscally neutral with neither regulator nor Chancellor incentivised to boost penalties as a source of income," Morris said.
Supervision is expected to become costlier because it will require studies of how firms make money and whether new products, even at the design stage, risk ripping off customers.
Front-line staff costs will rise 34.4 million this year.
"The FCA's first annual funding requirement highlights the regulator's aim to create a more 'proactive approach' to regulation... with the confirmation of the FCA's wish to increase the size of its front line supervision staff," said Monica Gogna, a partner at Pinsent Masons lawfirm.
The FCA will also have to ensure there is enough competition in financial services and, from next year, will supervise thousands of additional consumer credit firms as well.
The FCA budget will total 432.1 million pounds, with the PRA levying 214.2 million and nearly 70 percent of that on firms that accept customer deposits, meaning the high street banks.
The same minimum fee levied by both of the new watchdogs -- which applies to 42 percent of the firms the FCA supervises -- will be kept at 1,000 pounds.
FCA chief executive Martin Wheatley said much of the fee hike is due to a new style of intensive supervision that will be far more pro-active, ending the discredited pre-crisis "light touch" era.
Insurers will be charged a total of 57.3 million by the PRA.