FSABritain's banks are facing a formal investigation over the sale of complex interest rate swaps to small and medium-sized businesses, it has been reported.

The Financial Services Authority (FSA) is set to reveal this week that it has found evidence of mis-selling as part of a review into the way lenders pushed the controversial derivatives, the Sunday Telegraph said.

Banks have denied any wrong-doing, saying they followed the rules on providing the swaps, which were a hedge against interest rates rising. When interest rates collapsed in the wake of the financial crisis, firms were left with high costs that some have claimed forced them out of business.

A full investigation by the FSA would take at least a year and raise the prospect of banks being hit with large fines as well as bans for any staff found to have broken rules. It is likely that banks will be under pressure to agree to a voluntary compensation scheme for victims.

The mis-selling claims follow the controversy over the sale of unnecessary payment protection insurance to millions of bank customers.

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 only offered one product and the bank made no effort to provide a choice.

A survey by Bully Banks, which has been set up by 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.