LONDON, Sept 9 (Reuters) - Britain's markets watchdog set out proposals on Thursday on how it will use a new power to cancel unused business licenses faster and learn from the collapse of investment firm London Capital & Finance (LCF).

Financial firms that are authorized by the Financial Conduct Authority (FCA) are on a public register, but incorrect or outdated entries can mislead consumers about the level of protections they have, or give credibility to a firm's unregulated activities, known as the "halo effect."

The new power, granted to the FCA under a financial services law approved by parliament earlier this year, will shorten the process of removing a firm's license to about a month and a half. Previously, the FCA had to wait a year before it could intervene.

"We want to use this power to take quicker action to prevent consumers being misled," Mark Steward, the FCA's executive director of enforcement and market oversight, said in a statement.

"Firms can and should apply to have their permissions canceled if they no longer plan to use them but many fail to do so."

An independent report into FCA failings surrounding the collapse of LCF highlighted a risk of firms remaining authorized when some or all of their activity is no longed regulated.

Many of the investors in LCF's unregulated 'mini bonds' were not covered by Britain's financial compensation scheme even though LCF itself had a license, forcing the government to step in to pay compensation.

Simon Morris, a financial services partner at CMS law firm, said the proposals were an important housekeeping measure designed to prune licenses for activities not being carried out, and curb firms that have become part or fully dormant.

"This is to stop another London Capital, where the firm remained FCA authorized but without any regulated business," Morris said. (Reporting by Huw Jones Editing by Jon Boyle and Mark Potter)