* Regulator expects banks to "find solution" for affected clients
* Says 17,000 derivatives contracts held by Dutch small businesses
* Asks banks to examine how contracts were sold
AMSTERDAM, May 28 Banks in the Netherlands may have sold Dutch small businesses inappropriate hedging products, the country's financial markets regulator said on Wednesday, warning that banks that had done so would be responsible for finding a solution for their clients.
The Dutch Financial Markets Authority (AFM) said a survey it conducted into interest-rate derivatives provided to small businesses suggested there might have been specific cases of inappropriate services being offered, or of services being offered without due care.
Banks have come under fire across Europe in recent months for mis-selling derivatives - complex financial instruments most commonly used to hedge against risks such as rising interest rates - to small businesses and public authorities.
In March, an Italian court acquitted four international banks of mis-selling derivatives to the city of Milan.
Meanwhile, 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 ($6.3 billion) to compensate small businesses mis-sold interest-rate hedging products.
The AFM said Dutch small businesses held about 17,000 interest-rate derivatives. Most of the contracts were interest-rate swaps and the average sum being hedged was about 1.5 million euros ($2 million).
The businesses in question were in the "non-professional" category, meaning they had a balance sheet worth less than 20 million euros, turnover of less than 40 million euros and assets of less than 2 million euros.
About 90 percent of the derivatives held by small businesses had been provided by three banks. A person familiar with the report said the banks in question were mutual lender Rabobank and state-owned ABN Amro and SNS Reaal .
The authority has asked the banks to review their books to establish how the contracts were sold and whether client needs were considered appropriately at the time. A spokeswoman said it did not have the power to instruct banks to do so in this case.
Banks in the Netherlands have been heavily criticised since the global financial crisis, with several requiring state bail-outs. Last year Rabobank was fined $1 billion for rigging interest rates in the so-called Libor scandal.
Although companies were using the derivatives to hedge interest-rate risks worth about 26 billion euros, the contracts had a negative value in April, meaning it would cost around 2.7 billion euros to exit them, according to the AFM.
"It is important to establish rapidly the extent to which inappropriate services were provided, or provided without due care," the AFM said, adding that it hopes to have a clearer picture of the extent of the problem once the banks have examined the contracts.
"That the current value of a derivative is negative is not necessarily a problem," the AFM said. "But it can cause a problem if the underlying loan or the derivative is changed or ended before term."
The AFM said it expected any banks that had sold inappropriate derivatives to customers, or that had failed to exercise due care in selling a product, to find a solution to any problems that arose for the customers. ($1 = 0.5952 British Pounds) ($1 = 0.7345 Euros)
(Reporting By Thomas Escritt; Editing by David Goodman)