UK banks award only 28pct from refund pot for mis-sold products

* 1.06 billion pounds so far paid out to customers

* Regulator says banks have finished reviewing cases

* RBS (LSE: RBS.L - news) , Barclays (LSE: BARC.L - news) yet to inform all customers of decision

* Proportion of firms offered alternative products rises (Adds comment from lawyer, advisor, BBA)

By Matt Scuffham

LONDON, June 12 (Reuters) - Britain's biggest banks have so far paid out less than 30 percent of the 3.75 billion pounds ($6.3 billion) set aside to cover the mis-selling of complex interest rate hedging products, according to data from the financial regulator.

The Financial Conduct Authority (FCA) ordered banks to review 29,490 cases for possible mis-selling last May after finding "serious failings" in the way the products were sold.

But when the banks did so, nearly a third of customers were dismissed because they were deemed sophisticated enough to have understood the products. More than half of those left under review were then offered alternative hedging products rather than full cash compensation.

"If you look at the sheer number that have been excluded it's just absurd and if you look at the amount of alternative products offered, it is ridiculous," said Abhishek Sachdev, managing director of Vedanta Hedging, which advises businesses on the products. He said only a small proportion of firms had been satisfied with the outcome.

The original products were supposed to protect small businesses against rising interest rates but left many facing crippling payments when interest rates fell. Companies also faced hefty penalties to get out of the arrangements which many said they were not warned about.

The regulator said on Thursday that banks had met a 12-month deadline for reviewing all the cases although Barclays (Berlin: BCY.BE - news) and Royal Bank of Scotland had yet to communicate all decisions to customers.

The FCA said the banks - which also include Lloyds Banking (Xetra: LLD.DE - news) Group and HSBC - had sent out 13,740 decisions to customers by the end of May. 6,730 customers had accepted compensation and 1.06 billion pounds had been paid out.

The FCA's data showed that banks offered to pay full cash compensation in 49 percent of decisions communicated by the end of May, compared with 52 at the end of April and 57 percent at the end of March.

Alternative hedging products have been offered in 44 percent of cases so far compared with 39 percent at the end of April and 36 percent at the end of March.

Many businesses have said they didn't want the alternative product offered any more than original one and had expected cash compensation instead.

"There's a big question mark as to whether it was ever fair for alternative products to be substituted. I don't think there's a natural argument that, because you were mis-sold A, you would have had B anyway," said Alison Loveday, managing partner at law firm Berg.

The British Bankers Association said all the decisions had been verified by independent reviewers, which banks were told to appoint by the regulator.

Barclays has set aside 1.5 billion pounds to compensate customers, RBS 1.25 billion pounds, Lloyds 530 million pounds and HSBC $598 million.

The FCA said money set aside by the banks also covered the loss of the payments which customers would have made to them in the future under the existing arrangements, the cost of employing more than 3,000 staff to review the cases and the cost of hiring independent assessors to review each case.

($1 = 0.5956 British Pound) (Reporting by Matt Scuffham; Editing by Sophie Walker)