Four former dealers at UBS plundered customer accounts to trade and dumped the resulting losses on them, Britain's financial regulator said, further denting the battered Swiss bank's reputation.

The scandal has cost UBS more than $55 million as the Financial Services Authority slapped on an 8 million pound ($13.2 million) penalty -- its third largest ever -- and the bank compensated clients by more than $42 million.

The Zurich-based bank's systems and controls failed to prevent four London-based employees carrying out unauthorised trades on at least 39 accounts over almost two years, the FSA said on Thursday.

The four dealers at UBS -- struggling to rebuild its reputation after a high-profile U.S. tax fraud probe -- traded foreign exchange and precious metals using customer money, with as many as 50 trades a day taking place at the peak.

These employees were able to take advantage of UBS's inadequate systems and controls, giving them free rein to make unauthorised trades with customer money that they were then able to conceal, said Margaret Cole, FSA director of enforcement and financial crime.

The FSA said UBS failed to heed warnings its systems might not appropriate.

However, UBS said it had taken full remedial action since a whistleblower raised the alarm internally and the trades, which took place between January 2006 and December 2007 at the bank's London-based wealth management business, came to light.

UBS deeply regrets this incident and, having fully co-operated with the FSA's investigation, we are now pleased that this matter has been settled so that we can move forward, it said in a statement. The employees have been fired.

Lawyers welcomed the news, saying the FSA's attempts to beef up its enforcement wing after the near-collapse of the financial system last October was bearing fruit.

(The) FSA ... now comes across as the credible deterrent against financial crime that it has so long talked about becoming, said Simon Morris of law firm CMS Cameron McKenna.

UBS -- which has written down more than $50 billion of assets because of the financial crisis and lost a mass of customers after the U.S. investigation into client tax evasion - paid the fine promptly, qualifying for a 20 percent discount.

The FSA said substantial financial penalties would help hammer home the message that if customers can fall victim to misconduct or crime by financial service industry employees, risks needed to be indentified and appropriately mitigated.

The UBS fine ranks third behind the 17 million pound penalty imposed by the FSA on oil giant Royal Dutch Shell in 2004 for overstating oil and gas reserves and a 13.9 million pound fine for a Citigroup unit for its trading strategy on the European government bond markets in 2004.

(Additional reporting by Clara Ferreira-Marques and Lisa Jucca in Zurich; Editing by David Holmes and Dan Lalor)

($1 = 0.6053 pound)

United kingdom Investment