Vince Cable has described rate swap mis-selling as a case of the "little guy paying for the big banks' wrongdoing" after the FSA accused large lenders of selling small businesses "absurdly complex products".
The business secretary said on Thursday that such "malpractices" have "no place in "Britain’s business environment, which we are committed to making one of the best and fairest in the world".
“This is an example of the little guy paying for the big banks’ wrongdoing," he added.
"I hope the banks will now properly compensate those small businesses that have unfairly lost money, time and energy during this regrettable episode," said Mr Cable.
“The immediate priority is to ensure small businesses are not driven out of business by banks pursuing liabilities for swaps that they mis-sold.”
His comments were echoed by Matthew Fell, director of competitive markets at the CBI, who described the mis-selling of interest rate products as "unacceptable".
"Any small business that has been mis-sold insurance products should be swiftly and fully restored to the position they would have been without the mis-sale," he added.
Their comments came after the findings of a review by the Financial Services Authority showed that more than 90pc of the complex interest rate derivatives sold by banks to small businesses could have been mis-sold, according to the findings of a review by the Financial Services Authority.
The FSA said that its analysis of 173 sales of interest rate hedging products to SMEs by Britain’s four largest banks found that 90pc “did not comply with one or more of our regulatory requirements” as it launched full review .
Martin Wheatley, chief executive designate of the Financial Conduct Authority, accused lenders of selling businesses “absurdly complex products” and said many customers could now expect compensation from their banks.
The swaps were presented as a "no-cost" form of insurance to protect small businesses against a rise in interest rates, but the unregulated instruments turned into significant liabilities.
Falling base rates were meant to help small businesses but with these products they generated charges that devoured savings and destroyed some once-sound family firms. They typically locked firms into rates of between 5pc and 6pc over base rates and as base rates fell, the charges kicked in.
Shocked at the amounts of cash being taken out of their accounts, many firms looked to cancel the swap only to find the cost of doing so prohibitive. One bed and breakfast with a £73,000 turnover faced a six-figure bill to escape. A property developer with £15m in borrowings across three loans and swaps to his name faces a £9m charge.
Mr Wheatley said of the review: “This marks significant progress in our review of these products. We believe that our work will ensure a fair and reasonable outcome for small and unsophisticated businesses,”
Barclays (LSE: BARC.L - news) , Lloyds Banking Group (LSE: LLOY.L - news) , HSBC (LSE: HSBA.L - news) and Royal Bank of Scotland (LSE: RBS.L - news) have been given the go-ahead to launch a redress scheme for mis-selling victims, with seven smaller lenders to begin compensating customers from February 12.
Banks have been given six months to complete their reviews of mis-selling, though the regulator said that lenders with large numbers of customers could take up to 12 months.
In its report on swap mis-selling the FSA said a “significant proportion” of businesses sold the products could expect some form of compensation. More than 40,000 swap products were sold to SMEs over the last decade, according to the regulator's latest estimate of the scale of the scandal.
Lenders have already set aside more than £700m against potential swap mis-selling claims, with Barclays making the largest provision so far of £450m.
However, with the FSA’s findings these provisions are likely to be increased, with the total bill expected to reach at least £1.5bn, though many derivatives experts believe the final cost could easily exceed £10bn.
The launch of the FSA's review followed an investigation by The Sunday Telegraph and The Daily Telegraph that uncovered evidence of serious mis-selling by the largest banks.
Anthony Browne, the chief executive of the Britiish Bankers' Association, said: "We are pleased that the FSA has reached agreement with the major banks to provide fair and reasonable redress for businesses affected ...
"The announcement today will give clarity to businesses and will enable the banks to put in place the steps needed to resolve each case for customers. Where customers have suffered unfairly the banks have all agreed that they will put it right."
He said banks would be contacting those companies affected shortly, "prioritising those with the greatest need".
The BBA said any business facing financial distress and is seeking a suspension of payments should get in touch with their bank immediately.