"All nine banks have now completed their sales reviews and have delivered redress letters to all but a handful of these customers," the FCA said in its quarterly update on so-called interest rate hedging products.

"In the coming months, the banks expect to deal with all remaining cases, including claims for consequential losses and customers who have challenged their redress offers," the FCA said.

The compensation total includes 464 million pounds for so-called consequential losses, which set the clock back to the point before the products were sold and require banks to compensate beyond the direct losses that businesses have suffered.

The products were bought by thousands of small companies to cover themselves from the risk of interest rates rising. As interest rates fell to very low levels in the aftermath of the global financial crisis, customers had to pay extra charges, typically running into tens of thousands of pounds.

The FCA said the banks took on 3,000 extra staff to send redress determination letters to 18,100 businesses.

To date 13,500 customers have accepted a redress offer, meaning 92 percent of offers have been accepted, the FCA said.

Banks have also set aside money to cover the costs of having to terminate customers' interest rate products early by bearing the cost of future payments.

However, the High Court in London granted law firm Mishcon de Reya permission in April last year to seek a judicial review of the compensation process in a case involving Holmcroft Properties Ltd, Barclays and accounting firm KPMG.

KPMG was appointed to independently oversee the FCA redress process in a move the watchdog said would speed up compensation and avoid costly litigation.

Mishcon de Reya is challenging KPMG's argument that its role was a matter of private contract and as such it was not subject to procedural fairness.

The outcome of the full judicial review hearing is pending but it could lead to a significant number of businesses claiming that KPMG has got it wrong in respect of their redress offers.

($1 = 0.6950 pounds)

(Additional reporting by Sinead Cruise; Editing by Greg Mahlich)

By Huw Jones