Accounting watchdog probes KPMG over BNY Mellon compliance

(Adds KPMG reaction, background)

LONDON, June 23 (Reuters) - Britain's accounting watchdog has opened an investigation into how accounting firm KPMG made sure that Bank of New York Mellon complied with rules on keeping customer money safe.

The Financial Reporting Council said on Tuesday the investigation would cover the conduct of KPMG auditors regarding BNY Mellon's London branch.

"We are committed to setting the highest standards in our work and will cooperate fully with the FRC in its enquiries," a KPMG spokesman said.

Britain's Financial Conduct Authority fined BNY Mellon, the world's biggest custody bank, 126 million pounds ($199 million) in April for failing to keep customer money safe during the financial crisis.

BNY's rule breaches spanned nearly six years from November 2007 to August 2013. This period included the collapse of Lehman Brothers in 2008, which prompted British regulators to check that custody banks were complying with safe-keeping rules.

KPMG, one of the world's "Big Four" accounting firms, was responsible for reporting to the financial regulator that BNY Mellon was complying with rules on the safe-keeping of customer assets.

The FRC's investigation will cover the years' that ended on 31 December 2007 to 31 December 2011. The watchdog has powers to impose unlimited fines and ban an accountant from the industry.

($1 = 0.6332 pounds) (Reporting by Huw Jones; editing by Jason Neely and Jane Merriman)