The Financial Conduct Authority (FCA) ordered banks to review nearly 30,000 cases in 2013 for possible mis-selling after finding serious failings in the way the products were sold.

The products were meant to protect smaller companies against rising interest rates, but when rates fell the companies had to pay extra charges, typically running to tens of thousands of pounds. They also faced hefty penalties to extricate themselves from the deals, which most said they were not aware of.

The FCA said on Thursday that banks had so far paid out 1.8 billion pounds in compensation, and set a deadline for the end of March for claims. The sums set aside also covered the cost of having to terminate agreements early and having to employ more than 3,000 people to review the cases.

The scheme has drawn sharp criticism from lawmakers and businesses that believe it is loaded in favour of the banks. In a parliamentary debate last December, lawmakers said it lacked transparency, was inconsistent and did not give victims a proper right of appeal.

Banks dismissed more than a third of the cases, with customers deemed sufficiently sophisticated to have understood the products. About half of those left in the review were then offered alternative products rather than cash compensation.

The mis-selling is one of a number of scandals involving British banks in the past five years, ranging from the attempted manipulation of foreign exchange and benchmark interest rates to the mis-selling of loan insurance.

Royal Bank of Scotland (>> Royal Bank of Scotland Group plc) faced more claims than any other bank in the scheme and has set aside 1.46 billion pounds for compensation. Barclays set aside 1.34 billion pounds while HSBC (>> HSBC Holdings plc) and Lloyds Banking Group (>> Lloyds Banking Group PLC) have set aside hundreds of millions.

Barclays reduced the amount it had set aside for compensation by 160 million pounds last October and banks will give an update on their provisions alongside full-years results in February and March.

Alison Loveday, managing partner of law firm Berg, which is working on cases of alleged swaps mis-selling, said other banks could also reduce the amounts they have set aside.

"I don't think the banks are being held to task on this...I don't think they ever thought they were going to have to pay them out and they haven't been forced to pay them so now they're releasing the money," Loveday said.

The FCA said 365 million pounds had been paid out to cover so-called consequential losses, which set the clock back to the point before the products were sold and require banks to compensate beyond the direct losses that businesses have suffered.

(Reporting by Matt Scuffham; Editing by Steve Slater and Susan Thomas)

By Matt Scuffham