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* Banks so far paid out 500,000 on swaps compensation
* They have set aside 3 billion pounds to deal with cases
* 10 out of over 15,000 customers compensated
* BBA says banks suspended payments for those in distress
By Matt Scuffham and Huw Jones
LONDON, Sept 4 (Reuters) - Britain's banks have paid out500,000 pounds ($780,000) of the 3 billion pounds they have setaside to compensate small firms mis-sold complex interest ratehedging products, the Financial Conduct Authority (FCA) said onWednesday.
The bill is the latest faced by banks, which are alsocompensating customers for mis-sold payment protection insurance(PPI). Two British banks have also been fined for manipulatingthe London Interbank Offered Rate, or Libor market benchmark.
The Federation of Small Businesses said the FCA had "laidbare depressing figures", which showed only 10 out of over15,000 affected small businesses had been offered compensationfor mis-sold interest rate hedging products (IRHP).
"We are quickly losing confidence in the banks and theregulator as this scheme remains unbelievably slow. We warnedthat if the process isn't quick and fair it would risk litigiousclaims, and further undermine confidence between small firms andthe banks," the lobby group said on Wednesday.
Interest rate swaps were designed to protect smallercompanies against rising interest rates but when rates fell,they had to pay large bills, typically running to tens ofthousands of pounds. Companies also faced penalties to get outof the deals, which many said they had not been warned about.
The review of potentially mis-sold IRHP, set up by the FCA,began in May. The regulator said in its first update on howbanks are responding to claims that by the end of August offersof redress had been accepted by businesses totalling half amillion pounds.
This figure is expected to increase rapidly over the comingmonths with 210 offers already sent out to customers and with afurther 1,700 due to be sent shortly, the FCA said.
Data from the FCA showed differing rates of progress indealing with cases at Britain's biggest four banks. Barclays has reached the redress offer and acceptance stage for92 sales, with 68 at HSBC, 13 at Lloyds and 20at RBS.
The banks have taken on 2,800 staff to review more than30,000 cases and the FCA expects most customers will be told bythe end of the year about the result of their review. More than25,000 sales or 85 percent of the total are being assessed.
"With 85 per cent of cases now under review, banks have madeprogress. But like the thousands of affected small businesses,we want to see redress paid quickly to those who have sufferedloss as the result of mis-selling," FCA Chief Executive MartinWheatley said.
Abhishek Sachdev, managing director of Vedanta Hedging,which advises firms on IRHP, criticised what he said was theslow rate of progress, saying only 0.03 percent of affectedbusinesses had so far received compensation.
VARIED PROGRESS
The FCA data showed majority state-owned RBS to have moreclaims under review than Lloyds, Barclays and HSBC combined.
RBS is assessing 10,500 cases, compared with 3,400 atBarclays, 3,300 at HSBC and 2,700 at Lloyds.
However RBS has set aside 750 million pounds forcompensation so far - far less than Barclays' 1.5 billionpounds, while Lloyds and HSBC have each set aside 400 millionpounds.
"If taken at face value, RBS appears the most likely bank torequire material additional provisions for the IRHP issue," saidInvestec analyst Ian Gordon.
Banks have also made varied progress in getting to gripswith cases, according to the data. Of the 10,500 cases RBS isassessing, it is still deciding whether 4,600 cases even qualifyfor the redress scheme, while Barclays has completed that stageof the review and Lloyds has less than 900 cases to consider.
RBS said it was committed to ensuring those mis-sold theproducts were compensated fairly.
"We are prioritising those businesses that are most indistress first, and working towards processing the majority ofcases within the timeframe set by the regulator," it said.
The British Bankers' Association (BBA), an industry lobbygroup, said the report showed the majority of customers had nowbeen contacted by their bank and their cases were beingreviewed.
The BBA also said banks had suspended IRHP payments forbusinesses in financial distress.
Due to their complicated nature, redress offers to customersmaking a claim for certain consequential losses may take longer,the FCA said.
Money set aside by banks to compensate for mis-selling PPIhas reached around 15 billion pounds so far, forcing lenders tobeef up their capital positions.
