* BoE says UK banks have "dreadful record" of mis-selling
* Deputy governor Bailey promises more vigilance in future
* Lawmakers fear BoE complacent over high-frequency trading
* One MP calls Carney "sly", would not play cards with him
By David Milliken and Tess Little
LONDON, July 15 The Bank of England said on Tuesday that British banks had a "dreadful record" on mis-selling complex interest rate hedging products to small businesses and warned that it would keep a close eye on them.
Before the financial crisis, many businesses bought the products to protect against interest rate rises, but ended up facing crippling costs after the BoE cut rates to a record-low 0.5 percent in March 2009.
Last year, the Financial Conduct Authority (FCA), a regulator, ordered Barclays, Royal Bank of Scotland , HSBC and Lloyds Banking Group to investigate nearly 30,000 cases of potential mis-selling.
To date the banks have paid out just a third of the 3.75 billion pounds ($6.38 billion) they set aside to pay compensation.
BoE Governor Mark Carney, speaking to a panel of lawmakers about financial stability, said there had been clear malpractice and that firms' problems should not be viewed as an inevitable side-effect of low interest rates.
"This just goes right back into the mis-selling issue, and it's not a monetary policy issue," he said.
Andrew Bailey, the BoE deputy governor responsible for bank regulation, said the "dreadful record of British banks and selling hedging products to customers" meant he would be looking closely to see if they bent new rules meant to stop this.
"We will have to be very vigilant about this," he said.
British banks have also set aside more than 20 billion pounds to compensate individual borrowers who were mis-sold so-called payment protection insurance policies to help them service loans if they fell ill or lost their job.
Some lawmakers were not happy with the BoE's assurances that it was keeping an eye on allegations of malpractice in high-frequency trading of shares in London.
New York's attorney general has filed a securities fraud lawsuit against Barclays, accusing the bank of giving an unfair edge to U.S. high-frequency traders.
Carney and Bailey said the FCA was looking at high-frequency trading in London, something that was not a BoE responsibility.
Some lawmakers said that kind of approach was responsible for the central bank's delay in spotting the risk of malpractice in currency markets, something it is now investigating.
Referring to a previous committee hearing where this topic had come up, Labour Party lawmaker George Mudie said Carney had appeared disingenuous. "Your face ... was just so sly, I would have never played cards with you," Mudie said.
Carney and Bailey said the current set-up - where the FCA is responsible for rooting out malpractice and the BoE is in charge of financial stability - had been agreed by lawmakers.
Two weeks earlier, Mudie's party colleague Pat McFadden had described the BoE under Carney as an "unreliable boyfriend" because of the mixed signals he had given on interest rates. ($1 = 0.5877 British pounds) (Editing by Susan Fenton)