The mis-selling of these sophisticated financial products is among numerous scandals facing the banking sector in recent years and the payouts come on top of more than 17 billion pounds set aside by British banks to compensate customers mis-sold loan insurance.

Britain's financial regulator said on Friday 158.6 million pounds, just 5 percent of the funds set aside, had been paid in compensation 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 to begin paying compensation last May after saying there were serious failings in the way banks sold interest-rate swaps.

The products were meant to insure small businesses against the risk of higher interest rates, but when rates fell, companies were left with bills typically running into tens of thousands of pounds or facing big penalties to get out of the deals.

The regulator has urged banks to get on with compensating customers, setting a deadline of May for the process to be completed, and said on Friday that banks had upped the pace since November and were working towards meeting that target.

However, swaps experts raised concerns over the proportion of cases where banks didn't need to pay compensation.

Daniel Hall, managing director of AllSquare, which advises companies pursuing claims, said the data showed 96 percent of swaps had been mis-sold, but only about 60 percent of completed cases had resulted in compensation.

"As these assessments and determinations are largely subjective, it raises questions about whether businesses are getting a fair rub of the green," Hall said.

SWIFT PROGRESS

The Federation of Small Businesses (FSB) said an estimated 40,000 businesses were still awaiting compensation.

"The banks must not get complacent and making swift progress in paying the remaining redress is the only way to rebuild trust," said FSB National Chairman John Allan.

By the end of December, 18,700 small firms had been invited by banks to have their cases reviewed. A total of 1,040 offers of compensation had been accepted by customers at the end of last month, up from 547 at the end of November. The average payout per case settled stood at 152,500 pounds.

In 872 of the cases, banks tore up the arrangement and paid cash compensation. In the remaining 168 cases, businesses have been offered alternative products. The average payout per offer of compensation stands at 152,500 pounds. In 672 cases, the banks were not required to compensate customers or offer an alternative product.

"Banks have picked up the pace since November; we asked that they focus their efforts on making far more rapid progress in assessing 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 a complaint under Britain's statute of limitations, and, as most of 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 news for them. Day-by-day more and more businesses are out of limitation," said Abhishek Sachdev, managing director of Vedanta Hedging, which advises firms on interest rate swaps.

The FCA data showed differing rates of progress in dealing with cases between the banks. RBS has told customers the outcome of the review in 1,505 cases, compared with 1,265 at HSBC, 727 at Lloyds and 683 at Barclays.

RBS has more claims under review than its big three rivals combined. It is assessing 9,194 cases, compared with 3,300 at Barclays, 3,253 at HSBC and 1,771 at Lloyds.

RBS has set aside 750 million pounds for compensation - half of the 1.5 billion at Barclays, which is the biggest provision of all the banks. HSBC has allotted 460 million pounds and Lloyds 400 million.

FCA Chief Executive Martin Wheatley said in November that the full bill will not be known for some time. He said the bulk of the money set aside so far is to pay back money actually paid for the products and banks have yet to set aside large amounts for so-called consequential losses.

(Editing by Marc Jones and David Holmes)

By Matt Scuffham