Some of Britain's biggest banks are facing a hefty compensation bill on Friday after the City watchdog said it found "serious failings" in the sale of complex financial products to small businesses.
Barclays, HSBC, Lloyds and Royal Bank of Scotland have agreed to compensate customers where the mis-selling of so-called interest rate swap arrangements (IRSAs) has occurred, the Financial Services Authority (FSA) said.
IRSAs are complicated derivatives products that may have been sold as protection - or to act as a hedge - against a rise in interest rates without the customer fully grasping the downside risks.
Banks sold around 28,000 interest rate protection products to customers since 2001, the FSA added.
Martin Wheatley, managing director of the FSA's conduct business unit, said: "For many small businesses this has been a difficult and distressing experience with many people's livelihoods affected."
The claims echo the payment protection insurance (PPI) scandal that emerged last year, costing banks billions of pounds, and come in the week Barclays was fined £290m for manipulating the rates at which banks lend to each other.
As well as offering redress directly for those customers that bought the most complex products, the banks have also agreed to stop marketing certain IRSA products to retail customers, the FSA said.
The City regulator has spent the last two months reviewing the sale of IRSAs, talking to more than 100 customer who came forward.
It found poor sales tactics including failing to provide sufficient information on the hefty exit costs involved, failure to gauge the customers' understanding of risk and found rewards and incentives were a driver of these practices.
The FSA added that not all businesses will be owed redress, but for those that are, the exact redress will vary from customer to customer. This exercise will be scrutinised by an independent reviewer at each bank appointed under the FSA's powers.
Wheatley added that he had received personal reassurances from the bosses of the banks involved - including Bob Diamond at Barclays - that they will have responsibility for oversight of this work.
The British Bankers' Association, the leading trade association for the UK banking and financial services sector with more than 200 member banks, said: "Our members have been working closely with the FSA while it carries out its thematic review into interest rate swaps and will continue to co-operate fully."
In a statement, Lloyds, which set aside £3.6bn to cover the cost of PPI compensation, said it did not expect the costs of redressing customers who were missold IRSA products to be "material".
It said: "Interest rate derivative products are not products the group has sold widely.
"Given the limited exposure of the group to these products the financial impact of this remediation and the associated costs are not expected to be material to the group."
A debate in the House of Commons last week saw MPs from across the country offer examples of mis-selling for the interest rate swap products.
Aberconwy MP Guto Bebb claimed thousands of businesses lost large amounts of money after being mis-sold the complex products by their banks, and many were told that without signing up they risked being refused credit.
He said many business people did not understand the deals but trusted their bank manager. In other cases, he said, businesses were offered only one product and the bank made no effort to provide a choice.
A survey by Bully Banks, which has been set up by alleged victims of swap mis-selling, found nearly three quarters of its members claim to have been forced to buy a swap by their lending bank as a condition of their loan.Suggest a correction