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* 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 (Reuters) - The Bank of England said onTuesday that British banks had a "dreadful record" onmis-selling complex interest rate hedging products to smallbusinesses and warned that it would keep a close eye on them.
Before the financial crisis, many businesses bought theproducts to protect against interest rate rises, but ended upfacing crippling costs after the BoE cut rates to a record-low0.5 percent in March 2009.
Last year, the Financial Conduct Authority (FCA), aregulator, ordered Barclays, Royal Bank of Scotland, HSBC and Lloyds Banking Group toinvestigate nearly 30,000 cases of potential mis-selling.
To date the banks have paid out just a third of the 3.75billion pounds ($6.38 billion) they set aside to paycompensation.
BoE Governor Mark Carney, speaking to a panel of lawmakersabout financial stability, said there had been clear malpracticeand that firms' problems should not be viewed as an inevitableside-effect of low interest rates.
"This just goes right back into the mis-selling issue, andit's not a monetary policy issue," he said.
Andrew Bailey, the BoE deputy governor responsible for bankregulation, said the "dreadful record of British banks andselling hedging products to customers" meant he would be lookingclosely 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 billionpounds to compensate individual borrowers who were mis-soldso-called payment protection insurance policies to help themservice loans if they fell ill or lost their job.
Some lawmakers were not happy with the BoE's assurances thatit was keeping an eye on allegations of malpractice inhigh-frequency trading of shares in London.
New York's attorney general has filed a securities fraudlawsuit against Barclays, accusing the bank of giving an unfairedge to U.S. high-frequency traders.
Carney and Bailey said the FCA was looking at high-frequencytrading in London, something that was not a BoE responsibility.
Some lawmakers said that kind of approach was responsiblefor the central bank's delay in spotting the risk of malpracticein currency markets, something it is now investigating.
Referring to a previous committee hearing where this topichad come up, Labour Party lawmaker George Mudie said Carney hadappeared disingenuous. "Your face ... was just so sly, I wouldhave never played cards with you," Mudie said.
Carney and Bailey said the current set-up - where the FCA isresponsible for rooting out malpractice and the BoE is in chargeof financial stability - had been agreed by lawmakers.
Two weeks earlier, Mudie's party colleague Pat McFadden haddescribed 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)
