FSA says 90% of interest rate swap products were mis-sold Britain's scandal-hit banking industry was facing another hefty compensation bill today after the City watchdog said more than 90 per cent of small businesses had been mis-sold complex products designed to protect them from rising interest rates. The Financial Services Authority (FSA) said a significant proportion of the 173 cases were likely to result in redress being due to the customer. It is believed that as many as 40,000 of the interest rate swaps could have been mis-sold to small businesses since the end of 2001 after the FSA highlighted "serious failings" in the sale of the products last summer. The FSA said the UK's four big banks - Barclays, HSBC, Lloyds and RBS - have agreed to start work on reviewing individual sales and providing compensation. It is thought the cost of compensating businesses could total as much as £1.5 billion across the sector, with Barclays, HSBC and RBS having already set aside around £630 million to cover potential claims. Interest rate swaps are complicated derivatives that might 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. They were marketed as low-cost protection against rising interest rates, often as a condition of a business loan. However, businesses as small as bed and breakfasts and takeaway shops were left with major bills after the financial crisis caused interest rates to slide. The FSA has also provided guidelines for banks to differentiate between sophisticated firms that knew what they were buying and small firms that did not understand the products. Martin Wheatley, chief executive designate of the Financial Conduct Authority, which will replace the FSA later this year, said: "We believe that our work will ensure a fair and reasonable outcome for small and unsophisticated businesses. Where redress is due, businesses will be put back into the position they should have been without the mis-sale. But it is important to remember that this review is firmly focused on the particular circumstances of each sale. These will determine whether there were failings in the sales process and, if so, whether redress is due.