FSA raises number of dubious financial products sold by 40 per cent

The UK banking industry watchdog said as many as 40,000 complex financial products could have been mis-sold to small businesses, according to the latest estimate of the scale of the banking scandal.

The Financial Services Authority (FSA) confirmed it had raised its estimate of the number of so-called interest rate swap arrangements that were sold, by more than 40 per cent, from the initial 28,000.

According to the new figure which comes after the regulator received new information by the banks, the liklihood of  banks facing a massive compensation bill was a distinct possibility.

Three of the biggest banks in Britain - Barclays, HSBC and Royal Bank of Scotland - had already earmarked £630 million to cover the cost of potential mis-selling claims.

The FSA said in June that it found "serious failings" in the sale of the interest rate swap products to small businesses.

The products 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.