* 598.4 million pounds paid out by banks at end March
* 4 billion pounds has been set aside by 'Big 4' banks
* Some firms taking legal action for consequential losses
* Consequential loss bill could be 6 bln stg -Claims Firm
* Average payout falls to 131,000 pounds/case (Adds comment, data on average payouts, offers accepted)
By Matt Scuffham
LONDON, April 8 (Reuters) - Britain's financial watchdogurged small businesses that were mis-sold interest rate hedgingproducts to join its compensation scheme, which has so far paidout less than 600 million pounds ($996.63 million) from nearly 4billion set aside by banks.
The Financial Conduct Authority said on Tuesday banks wereon track to meet a deadline for completing a review of nearly30,000 cases of mis-selling by the end of May, but urged firmswhich had not yet opted into the scheme to do so.
But some small businesses have chosen to take legal actionagainst banks instead, pursuing claims for consequential losseswhich could lead to bigger payouts. They have also been put offby the prospect of being offered alternative products by thebanks, which they do not want, instead of cash compensation.
The regulator ordered banks to start compensating firms lastMay after finding serious failings in the way the interest ratehedging products - known as swaps - were sold.
The products were designed to protect smaller companiesagainst rising interest rates but, when rates fell, firms facedcosts running to tens of thousands of pounds. They also facedpenalties to get out of the deals, which many said they had notbeen told about.
Under the compensation scheme, banks have offered businessesalternative hedging products in more than a third of cases andthe average payout per case has been steadily falling throughoutthe review. It stood at 131,000 pounds per case at the end ofMarch, down from 140,000 at the end of February.
"Some people have lost all faith in the review and aretalking legal action. What they (banks) have paid out is apittance," said Abhishek Sachdev, managing director of VedantaHedging, which advises businesses on the products.
Mark Garnier, a Conservative member of parliament who sitson the Treasury Select Committee has vowed to keep up pressureon the regulator and banks to secure a fair deal for claimants.
"We are very angry and we are doing our level best to putpressure on the regulator," he said at a meeting of claimants inLondon last month.
CONSEQUENTIAL LOSSES
Consequential loss claims set the clock back to the pointbefore the products were sold and require banks to compensatenot just the direct cost of the mis-sold contracts but anylosses that businesses have suffered as a result of entering theagreements. They could result in the overall bill for banksbeing much higher than currently anticipated.
The regulator has said an offer by banks to pay customers 8percent annual interest on the compensation received is a 'fairalternative' to consequential loss claims.
"The question of consequential loss is still a huge concernfor the banks involved as this bill could be as high as 6billion pounds," said Daniel Hall, managing director of AllSquare, which advises companies pursuing claims.
The FCA said that, by the end of March, Britain's biggestfour banks - Barclays, HSBC, Lloyds BankingGroup and Royal Bank of Scotland - had paid out598.4 million pounds ($993.97 million) in compensation, up from482 million a month earlier.
Out of the 29,563 cases reviewed by banks, 18,800 qualifiedto join the scheme which is restricted to businesses deemed tobe financially "unsophisticated".
A decision has been communicated to customers in 9,758 casesbut less than half of those offers have been accepted so far.
Of the 9,758 cases so far decided, 5,540 swaps have beentorn up and customers offered full cash compensation. Customershave been offered alternative products in 3,484 cases while nocompensation has been offered in 734 cases.
"Businesses that are unhappy with what they are offeredshould not accept the first thing they are offered, and theyshould not give up hope, particularly if this is an'alternative' hedging product," Hall said.
Barclays has set aside 1.5 billion pounds to compensatecustomers, RBS 1.25 billion pounds, Lloyds 530 million poundsand HSBC $598 million. ($1 = 0.6020 British Pounds) (Editing by Steve Slater and Jane Merriman)