BRITISH banks face another round of compensation claims that could total billions of pounds after the regulator found they had widely mis-sold complex interest-rate hedging products to small businesses.
The interest-rate swaps are the latest in a series of costly banking scandals that include insurance on loans and mortgages that was also mis-sold, rigged global benchmark rates and breaches of anti- money laundering rules.
Britain's financial watchdog said on Thursday it found that in the 173 interest-rate swap test cases it examined, more than 90pc did not comply with at least one or more regulatory requirements.
A significant proportion will result in compensation being due, the Financial Services Authority (FSA) said.
Martin Berkeley, a senior consultant at Vedanta Hedging, which advises on interest-rate hedging products, said the final bill for banks could be as high as £10bn.
So far, the four biggest banks have set relatively small sums aside for compensation. Barclays has taken the highest provision at £450m, HSBC has set aside about £150m, RBS €50m and Lloyds has said the cost won't be material.
Investec's banking analyst Ian Gordon said he expected the overall bill for the industry to be around £1bn.
Banks have already set aside 12 billion pounds to compensate customers mis-sold payment protection insurance (PPI) and industry sources expect that number to double.
The rate-swap products were designed to protect firms against rising interest rates, but when rates fell they had to pay large bills, typically running to tens of thousands of pounds. Companies also faced penalties to get out of the deals, which many said they were not told about.
Berkeley said the scandal has had a worse impact on victims than mis-selling of payment protection insurance to individuals.
"The difference between this and PPI is that people lost their homes and businesses. These products were toxic."
The FSA said Barclays, HSBC, Lloyds and RBS will review sales of the products. Customers will be contacted by their banks and need not involve other advisers.
Banks are keen to keep claims management companies out of the process, having blamed them for inflating the cost of compensation for mis-sold PPI.
The British Bankers Association, a lobby group, said the FSA's announcement will give clarity to businesses and enable banks to get on with compensating customers.
"Any business which is currently facing financial distress and is seeking a suspension of payments should get in touch with their bank immediately," its Chief Executive Anthony Browne said.
The FSA has estimated that over 40,000 interest-rate swap products were sold to small firms.