Britain's scandal-hit banking industry is facing another hefty compensation bill after a review of complex products sold to small businesses found more than 90% had been mis-sold.
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 Royal Bank of Scotland 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. But 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 which did not understand the products.
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.
Martin Wheatley, chief executive designate of the Financial Conduct Authority, said he hoped the FSA's actions will ensure a fair and reasonable outcome for small and unsophisticated businesses. He added: "Small businesses will now see the result of the review as the banks look at their individual cases."
Federation of Small Businesses (FSB) chairman John Walker 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. He added: "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."