UPDATE 1-UK banks pay out only 20 pct of swaps mis-selling funds

Thu May 8, 2014 5:44am EDT

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* 798 million pounds paid out so far

* Banks had set aside 3.75 billion pounds

By Matt Scuffham

LONDON, May 8 (Reuters) - Britain's biggest banks have so far paid out only a fifth of the funds they set aside to compensate small businesses mis-sold interest-rate hedging products, data from Britain's financial regulator showed on Thursday.

The Financial Conduct Authority (FCA) said that, by the end of April, compensation amounting to 798 million pounds ($1.4 billion) had been paid to 5,732 customers.

Britain's biggest four banks - Barclays, HSBC , Lloyds Banking Group and Royal Bank of Scotland - have set aside a total of 3.75 billion pounds to deal with the issue.

The FCA said banks were on track to meet a deadline for completing the review of nearly 30,000 cases for potential mis-selling within 12 months of starting the review. The regulator ordered banks to start compensating firms last May after finding serious failings in the way the hedging products - known as swaps - were sold.

The products were sold on the basis they would help protect smaller companies against the risk of rising interest rates, but when rates fell, they had to pay large bills, typically running to tens of thousands of pounds.

Companies faced penalties to get out of the deals, which many said they had not been told about when they bought them.

The FCA urged 1,300 firms who have yet to opt into the review to do so. Some small businesses have chosen to take legal action against banks instead, pursuing claims for consequential losses which could lead to bigger payouts.

($1 = 0.5894 British Pounds) (Editing by Chris Vellacott and David Holmes)

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