The overwhelming majority of interest rate hedging products have been mis-sold by banks, according to new research.

In a pilot study, the Financial Services Authority (FSA) indicated that sales of more than 90% of these products did not comply with at least one or more regulatory requirements.

A total of 173 test cases were looked at, of which the authority claimed a significant proportion would result in compensation payouts.

It said where redress was due, the fundamental principle was that it must be 'fair and reasonable' for individual customers.

Barclays, HSBC, Lloyds and RBS are to begin a full review of their transactions in this field and provide compensation where it is necessary.

An estimated 40,000 businesses, including a high number of farms, are believed to be affected, but concerns remain that not every business will receive the correct level of compensation they are due.

Bully-banks, the organisation created to co-ordinate complaints by the owners of small and medium- sized business on this issue, welcomed the positive moves made by the FSA.

However, it said there was still a fundamental hole in the authority's statement that needs to be addressed, describing the proposed settlement as a 'Polo settlement' because there was no definition of what 'fair and reasonable' actually meant.

Farmers feature prominently amongst the businesses affected, with Seneca Banking Consultants handling claims worth in excess of £100 million for such businesses.

Simon Britton, partner in Strutt & Parker's Northallerton office, said: "Over the last few months, we have been working with a number of farmers who have found themselves facing huge costs after buying complicated interest rate swaps.

"Unfortunately, although hedging products and swaps have definitely benefited some, thousands of small companies, including farms, have been left out of pocket and some are struggling to survive as a result of mis-sold products. Our clients say that the potential costs that would accompany a fall in interest rates, along with formidable 'break costs' were not made clear. Lots of farmers have been hit by this and it has damaged many businesses."