* Banks pay out 158 mln, 5 pct of 3 billion set aside
* Regulator wants compensation to be paid by May
* 1,040 offers accepted by customers
* Average payout per case is 152,500 stg
* FSB says 40,000 businesses awaiting compensation
By Matt Scuffham
LONDON, Jan 10 (Reuters) - Britain's biggest banks have sofar paid out only a fraction of the 3 billion pounds ($4.9billion) they have set aside to compensate small firms mis-soldinterest-rate hedging products, prompting suggestions businessesmay be getting a raw deal.
The mis-selling of these sophisticated financial products isamong numerous scandals facing the banking sector in recentyears and the payouts come on top of more than 17 billion poundsset aside by British banks to compensate customers mis-sold loaninsurance.
Britain's financial regulator said on Friday 158.6 millionpounds, just 5 percent of the funds set aside, had been paid incompensation by Britain's biggest four banks - Lloyds,Royal Bank of Scotland, Barclays and HSBC - by the end of December.
That compares with 81.2 million at the end of November.
The Financial Conduct Authority (FCA) had ordered banks tobegin paying compensation last May after saying there wereserious failings in the way banks sold interest-rate swaps.
The products were meant to insure small businesses againstthe risk of higher interest rates, but when rates fell,companies were left with bills typically running into tens ofthousands of pounds or facing big penalties to get out of thedeals.
The regulator has urged banks to get on with compensatingcustomers, setting a deadline of May for the process to becompleted, and said on Friday that banks had upped the pacesince November and were working towards meeting that target.
However, swaps experts raised concerns over the proportionof cases where banks didn't need to pay compensation.
Daniel Hall, managing director of AllSquare, which advisescompanies pursuing claims, said the data showed 96 percent ofswaps had been mis-sold, but only about 60 percent of completedcases had resulted in compensation.
"As these assessments and determinations are largelysubjective, it raises questions about whether businesses aregetting a fair rub of the green," Hall said.
SWIFT PROGRESS
The Federation of Small Businesses (FSB) said an estimated40,000 businesses were still awaiting compensation.
"The banks must not get complacent and making swift progressin paying the remaining redress is the only way to rebuildtrust," said FSB National Chairman John Allan.
By the end of December, 18,700 small firms had been invitedby banks to have their cases reviewed. A total of 1,040 offersof compensation had been accepted by customers at the end oflast month, up from 547 at the end of November. The averagepayout per case settled stood at 152,500 pounds.
In 872 of the cases, banks tore up the arrangement and paidcash compensation. In the remaining 168 cases, businesses havebeen offered alternative products. The average payout per offerof compensation stands at 152,500 pounds. In 672 cases, thebanks were not required to compensate customers or offer analternative product.
"Banks have picked up the pace since November; we asked thatthey focus their efforts on making far more rapid progress inassessing individual cases and crucially in providing redress,"said FCA director of supervision, Clive Adamson.
Businesses have a six year time limit in which to lodge acomplaint under Britain's statute of limitations, and, as mostof the products were sold prior to the 2008 financial crisis,time is running out to make a claim.
"If they go past their six-year period then it is bad newsfor them. Day-by-day more and more businesses are out oflimitation," said Abhishek Sachdev, managing director of VedantaHedging, which advises firms on interest rate swaps.
The FCA data showed differing rates of progress in dealingwith cases between the banks. RBS has told customers the outcomeof the review in 1,505 cases, compared with 1,265 at HSBC, 727at Lloyds and 683 at Barclays.
RBS has more claims under review than its big three rivalscombined. It is assessing 9,194 cases, compared with 3,300 atBarclays, 3,253 at HSBC and 1,771 at Lloyds.
RBS has set aside 750 million pounds for compensation - halfof the 1.5 billion at Barclays, which is the biggest provisionof all the banks. HSBC has allotted 460 million pounds andLloyds 400 million.
FCA Chief Executive Martin Wheatley said in November thatthe full bill will not be known for some time. He said the bulkof the money set aside so far is to pay back money actually paidfor the products and banks have yet to set aside large amountsfor so-called consequential losses.