Britain's biggest banks are to begin the process of compensating thousands of small businesses after a review found more than 90% had been mis-sold complex financial products.
The Financial Services Authority (FSA) looked at 173 cases where so-called interest rate swaps had been sold to small firms as part of a pilot study and said a "significant" proportion were likely to result in redress being due to the customer.
UK lenders are expected to face a compensation bill of at least £1 billion in what marks the latest in a long line of recent scandals to hit the sector.
It is believed that as many as 40,000 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 Banking Group and Royal Bank of Scotland - have agreed to start work on reviewing individual sales and providing compensation.
The Federation of Small Businesses (FSB) said the findings were alarming but will also come as a relief to the thousands of small firms who have been waiting for clarity on the situation. Chairman John Walker said: "Now the pressure is on the banks to contact its customers. They must do so quickly and decisively to draw a line under this matter and bring the situation to a close."
The FSA has also been reviewing sales of interest rate swaps by Allied Irish Bank, Bank of Ireland, Clydesdale and Yorkshire banks, Co-operative Bank, and Santander UK. It expects to confirm by February 14 that these banks can launch their own reviews.
Spanish owned banking giant Santander UK said it has uncovered a raft of former Alliance & Leicester small business customers that were potentially mis-sold interest rate swaps.
Financial Secretary to the Treasury Greg Clark said the update from the FSA makes a step towards "righting the wrongs of the past".
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.
