(Reuters) - Switzerland's UBS has begun settlement talks over allegations it was involved in manipulating foreign exchange rates, the bank said, and warned that it could face a material penalty in any deal struck.

The terms proposed in the talks included findings that UBS did not have adequate controls over its foreign exchange business, it said in a share-swap prospectus published on Monday.

UBS, Switzerland's largest bank, did not identify the regulator concerned but the prospectus said that other investigating authorities could also start settlement talks in the near future. A spokesman for the company declined to elaborate beyond what was said in the prospectus.

However, sources told Reuters on Friday that Britain's Financial Conduct Authority (FCA) was talking to UBS and five other banks - Barclays, HSBC, Royal Bank of Scotland, JP Morgan and Citi - about a possible settlement that could results in each bank being fined hundreds of millions of pounds.

The banks are expected to be fined different amounts, depending on the gravity of the alleged misconduct, the sources said.

As well as the FCA, authorities in the United States, Switzerland and Hong Kong are investigating the $5.3 trillion a day foreign exchange market.

Reuters reported this month that banks were pushing for a coordinated settlement with the FCA, which was on track to be reached by the end of the year.

The maximum potential fine for one bank was put forward at between 300 million pounds and 400 million pounds, with the others pegged below 300 million pounds, one source familiar with the matter said.

The FCA launched an investigation last October into allegations that bank traders used advance knowledge of client orders to try to manipulate foreign exchange benchmarks.

In recent months the investigation has focused on lax internal compliance, oversight failures and market conduct breaches by individual employees rather than deliberate manipulation of the market, sources have told Reuters.

More than 30 traders from various banks have been put on leave, suspended or fired. No individual or bank has been formally accused of any wrongdoing.