* Swiss competition body opens probe into eight banks on FX
* "Evidence exists that banks colluded" on FX rates -WEKO
* UK FCA to assess if banks have cut benchmark rigging risk
* FX market could take years to recover - industry chief (Adds details from UK financial watchdog)
By Caroline Copley and Patrick Graham
ZURICH/LONDON, March 31 Swiss and British regulators stepped up their scrutiny of alleged manipulation of foreign exchange markets on Monday, as watchdogs take a closer look at whether banks have a tight enough grip on the behaviour of their traders.
Switzerland's competition commission WEKO said it opened an investigation into several Swiss, British and U.S. banks over potential collusion to manipulate currency rates.
The UK Financial Conduct Authority (FCA), meanwhile, said it will assess if banks have cut the risk of traders manipulating benchmark rates in the coming year, to see if lessons have been learned from the scandal over benchmark rate rigging.
WEKO said it is investigating UBS, Credit Suisse , Zuercher Kantonalbank (ZKB), Julius Baer, JP Morgan, Citigroup, Barclays and Royal Bank of Scotland.
"Evidence exists that these banks colluded to manipulate exchange rates in foreign currency trades," WEKO said, adding it assumed the most important exchange rates were affected.
Regulators around the world are looking closely at traders' behaviour on a number of key benchmarks, spanning interest rates, foreign exchange and commodities markets.
Eight financial firms have already been fined billions of dollars by U.S. and European regulators in the past two years for manipulating benchmark interest rates and several more are being investigated.
The probe into currency trading could be even more costly. Authorities in the United States, Britain, Switzerland, Germany and Singapore are looking into allegations of collusion and manipulation by traders at major banks of the largely unregulated $5.3 trillion-a-day foreign exchange market.
"Even if there is no further alleged wrongdoing, the current concerns will take years to work out," said Marshall Bailey, head of the ACI Financial Markets Association, the sector's main international umbrella organisation.
Credit Suisse said it was "astonished" to be drawn into such a probe after not being subject to a preliminary investigation last year. It said WEKO's statement contained incorrect references to Credit Suisse which were "inappropriate and harmful" to its reputation.
Aside from the fines, banks fear that the response to the row from international regulators and politicians will put an end to the self-regulation model the sector has championed for decades and, in the process, raise the cost of foreign exchange dealing for banks, companies and individuals.
WEKO said it was in touch with some international authorities but had not been prompted by a foreign authority to open the investigation. "We have to conduct the investigation ourselves. There's no legal basis at the moment to exchange data directly with foreign authorities," WEKO Director Rafael Corazza told Reuters.
WEKO opened a preliminary investigation last October after learning about potential manipulation of foreign exchange markets.
Julius Baer said an internal investigation had found no evidence of foreign exchange market abuse. Zuercher Kantonalbank, Switzerland's biggest regional bank, said it would cooperate with authorities.
RBS said it would co-operate with any investigation, but declined further comment. UBS, JP Morgan, Barclays and Citi all declined to comment.
WEKO Vice Director Olivier Schaller said the WEKO investigation would take months and could result in fines of up to 10 percent of the turnover generated in the relevant market in Switzerland over the last three years.
UBS last week suspended up to six FX traders, bringing the total number of traders suspended, placed on leave or fired to around 30.
The Swiss National Bank (SNB) last year estimated the daily turnover in foreign exchange markets of 25 sizeable banks in Switzerland amounted to $216 billion.
London dominates foreign exchange trading, accounting for 40.9 percent of global turnover last year, compared with 18.9 percent in the United States and 3.2 percent in Switzerland, according to Bank of International Settlements (BIS) data.
The FCA said it will also look at whether investment banks are handling potential conflicts of interest adequately and ensuring so-called "Chinese walls" are strong enough - to prevent confidential information received in one part of the business not being abused by a different part of the business. (Additional reporting by Steve Slater, Silke Koltrowitz, Oliver Hirt, Rupert Pretterklieber and Anirban Nag; Editing by Jane Merriman and David Holmes)