FSABritain's scandal-hit banking industry is to face fresh scrutiny when the City watchdog publishes an update into the mis-selling of complex financial products to small businesses.

As many as 40,000 so-called interest rate swaps could have been mis-sold to small businesses since the end of 2001 after the Financial Services Authority (FSA) revealed last June it had uncovered "serious failings" in the sale of the products.


The FSA is expected to give its verdict on how banks have been handling complaints and how they must process them going forward.

It is thought the cost of compensating businesses could total as much as £1.5 billion across the sector, with 11 banks having signed up to a redress scheme being run by the FSA, including Santander UK and The Co-operative bank.

Three of Britain's biggest banks - Barclays, HSBC and Royal Bank of Scotland - have already set aside around £630 million to cover the cost of potential mis-selling claims and the forthcoming round of annual results will reveal the latest provisions in the industry.

The FSA is set to provide guidelines for banks to differentiate between sophisticated firms that knew what they were buying and small firms which did not understand the products.

Interest rate swaps are complicated derivatives that may 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.

Banks have been working with the FSA to begin the compensation process and have launched pilot reviews of some 200 alleged cases to assess if mis-selling took place and potential compensation.