UPDATE 1-UK banks pay out only 20 pct of swaps mis-selling funds

(Adds details)

* 798 million pounds paid out so far

* Banks had set aside 3.75 billion pounds

By Matt Scuffham

LONDON, May 8 (Reuters) - Britain's biggest banks have sofar paid out only a fifth of the funds they set aside tocompensate small businesses mis-sold interest-rate hedgingproducts, data from Britain's financial regulator showed onThursday.

The Financial Conduct Authority (FCA) said that, by the endof April, compensation amounting to 798 million pounds ($1.4billion) had been paid to 5,732 customers.

Britain's biggest four banks - Barclays, HSBC, Lloyds Banking Group and Royal Bank ofScotland - have set aside a total of 3.75 billion poundsto deal with the issue.

The FCA said banks were on track to meet a deadline forcompleting the review of nearly 30,000 cases for potentialmis-selling within 12 months of starting the review. Theregulator ordered banks to start compensating firms last Mayafter finding serious failings in the way the hedging products -known as swaps - were sold.

The products were sold on the basis they would help protectsmaller companies against the risk of rising interest rates, butwhen rates fell, they had to pay large bills, typically runningto tens of thousands of pounds.

Companies faced penalties to get out of the deals, whichmany said they had not been told about when they bought them.

The FCA urged 1,300 firms who have yet to opt into thereview to do so. Some small businesses have chosen to take legalaction against banks instead, pursuing claims for consequentiallosses which could lead to bigger payouts.

($1 = 0.5894 British Pounds) (Editing by Chris Vellacott and David Holmes)