Britain's financial regulator fined Royal Bank of Scotland's Direct Line and Churchill insurance subsidiaries 2.17 million pounds for altering files it had asked to inspect.

This is a serious breach, Tracey McDermott, the Financial Services Authority's acting director of enforcement, said in a statement on Wednesday.

The fine is intended to underscore to firms that it is of critical importance that material provided to the FSA must reflect the picture as it is - not as they might like it to be, she added.

Direct Line and Churchill staff altered 27 of 50 files the FSA had asked to look at as part of a review of the companies' customer complaint handling procedures, the regulator said, with one staff member forging the signatures of colleagues.

Most of the changes were minor and did not lead to customers suffering losses.

Although no customers were disadvantaged, we are very disappointed that we did not meet the standards we expect of ourselves and which the FSA expects of us, said Paul Geddes, Chief Executive of RBS' insurance division.

We have taken action to address these issues and to ensure we avoid such breaches in future.

RBS plans to sell or float its insurance division, Britain's biggest motor insurer, by the end of 2013 as payback for government aid the 83 percent state-owned bank received in the 2008 financial crisis.

(Reporting by Myles Neligan; editing by Sudip Kar-Gupta)