Some of Britain’s biggest banks are facing a hefty compensation bill today after the City watchdog said it found "serious failings" in the sale of complex financial products to small businesses.

Barclays, HSBC, Lloyds and Royal Bank of Scotland have agreed to compensate customers where the mis-selling of so-called interest rate swap arrangements (IRSAs) has occurred, the Financial Services Authority (FSA) said.

IRSAs are complicated derivatives products 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.

Banks sold around 28,000 interest rate protection products to customers since 2001, the FSA added.

Martin Wheatley, managing director of the FSA’s conduct business unit, said: "For many small businesses this has been a difficult and distressing experience with many people’s livelihoods affected."