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The Financial Services Authority says banks mis-sold specialist insurance known as interest rate swaps tied to thousands of small businesses.
The FSA said it had found "serious failings" in the sale of the products, designed to protect firms taking out loans against rising interest rates.
The FSA said it had reached agreement with Barclays, HSBC, Lloyds and RBS over providing "redress".
The mis-selling is the third case of serious malpractice at the UK's banks
Lloyds said that it had not sold these types of products widely, and therefore was not expecting the costs of redress to be substantial.
many were told that without signing up they risked being refused credit.
Bank of England governor Sir Mervyn King has called for a change in the UK's banking culture, saying they have treated their customers shoddily.
He said that many people in banking system were honest and hard working but had been "let down" by their leaders.