(Update 2: Tues 09/09/14 20:23:15)

LONDON (Sept 09): Banks are struggling to stamp out alleged collusion in the foreign exchange market, the chairman of Britain's Financial Conduct Authority (FCA) watchdog told a parliamentary committee on Tuesday.

The FCA and U.S. regulators are investigating allegations that dealers at major banks colluded and manipulated key reference rates in the $5.3 trillion a day foreign currency market, the world's biggest and least regulated.

"I think all the banks are really struggling as to how they stamp out that alleged activity," Wheatley said. "I know all of them are deeply embarrassed by what's happened and want to see that change. I know that they have put in place remedial action."

One area banks have clamped down on is in the use of online chatrooms, after allegations a group of foreign exchange traders shared client order information on one chatroom to try to corner the market and give them better control of pricing.

Banks have handed over reams of transcripts from chatrooms and emails to regulators to help them in their FX probe.

Online communications also featured prominently in a five-year probe into manipulation of a key interest rate known as the London interbank offered rate or Libor, which has cost banks such as Barclays and UBS billions of dollars in penalties.

At the centre of the FX investigation is activity around the 4 p.m. currency fix in London, a 60-second window where key exchange rates are set. These prices are used as reference rates for trillions of dollars of investments and trades globally.

"It's very unfortunate that we've had what appears to be abuse in a number of sectors in the market follow on from the Libor fines," Wheatley said.