Britain's new markets watchdog wants competition powers in its bigger arsenal to end the country's litany of financial product scandals that led to 15 billion pounds in compensation over two decades.

Martin Wheatley, who will head the new Financial Conduct Authority (FCA), said a draft law to shake up financial supervision should give the FCA competition powers over financial products currently held by the Office of Fair Trading.

Our ideal is to have a very clear demarcation line and we would take on competition issues in financial services, Wheatley told MPs.

The FCA, which is due to be formally launched in early 2013, would need to bulk up on lawyers and other staff with competition expertise, Wheatley said.

The current UK watchdog, the Financial Services Authority, is being scrapped next year and replaced with two new bodies, the standalone FCA, and a new prudential unit at the Bank of England.

Margaret Cole, who is expected to be Wheatley's deputy, said if the FSA had had competition powers, it could have stepped in earlier to deal with the misselling of payment protection insurance (PPI) which will cost banks billions of pounds in compensation to investors.

While probing PPI, the competition authorities stepped in and the FSA drew back.

There is an important lesson to learn there, Cole said.

The FCA will be given powers to intervene far earlier in stopping harmful products at the design stage, force the withdrawal of promotional material, and issue public warnings that probes into a financial firm have begun.

We would prefer to have the competition mandate as well, Cole said.

She dismissed industry unease over public warnings, saying they would only be made after a judgement was reached that there is a case to answer, and that concerns were not simply just a twinkle in our eye.

Being forced to consult before issuing such warnings would be a recipe for distracting litigation, warned.

(Reporting by Huw Jones; Editing by Elaine Hardcastle)