* 1.06 billion pounds so far paid out to customers
* Regulator says banks have finished reviewing cases
* RBS, Barclays 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 sofar paid out less than 30 percent of the 3.75 billion pounds($6.3 billion) set aside to cover the mis-selling of complexinterest rate hedging products, according to data from thefinancial regulator.
The Financial Conduct Authority (FCA) ordered banks toreview 29,490 cases for possible mis-selling last May afterfinding "serious failings" in the way the products were sold.
But when the banks did so, nearly a third of customers weredismissed because they were deemed sophisticated enough to haveunderstood the products. More than half of those left underreview were then offered alternative hedging products ratherthan full cash compensation.
"If you look at the sheer number that have been excludedit's just absurd and if you look at the amount of alternativeproducts offered, it is ridiculous," said Abhishek Sachdev,managing director of Vedanta Hedging, which advises businesseson the products. He said only a small proportion of firms hadbeen satisfied with the outcome.
The original products were supposed to protect smallbusinesses against rising interest rates but left many facingcrippling payments when interest rates fell. Companies alsofaced hefty penalties to get out of the arrangements which manysaid they were not warned about.
The regulator said on Thursday that banks had met a 12-monthdeadline for reviewing all the cases although Barclays and Royal Bank of Scotland had yet to communicate alldecisions to customers.
The FCA said the banks - which also include Lloyds BankingGroup and HSBC - had sent out 13,740 decisionsto customers by the end of May. 6,730 customers had acceptedcompensation and 1.06 billion pounds had been paid out.
The FCA's data showed that banks offered to pay full cashcompensation in 49 percent of decisions communicated by the endof May, compared with 52 at the end of April and 57 percent atthe end of March.
Alternative hedging products have been offered in 44 percent of cases so far compared with 39 percent at the end ofApril and 36 percent at the end of March.
Many businesses have said they didn't want the alternativeproduct offered any more than original one and had expected cashcompensation instead.
"There's a big question mark as to whether it was ever fairfor alternative products to be substituted. I don't thinkthere's a natural argument that, because you were mis-sold A,you would have had B anyway," said Alison Loveday, managingpartner at law firm Berg.
The British Bankers Association said all the decisions hadbeen verified by independent reviewers, which banks were told toappoint by the regulator.
Barclays has set aside 1.5 billion pounds to compensatecustomers, RBS 1.25 billion pounds, Lloyds 530 million poundsand HSBC $598 million.
The FCA said money set aside by the banks also covered theloss of the payments which customers would have made to them inthe future under the existing arrangements, the cost ofemploying more than 3,000 staff to review the cases and the costof hiring independent assessors to review each case.
($1 = 0.5956 British Pound) (Reporting by Matt Scuffham; Editing by Sophie Walker)