The City regulator says it has found "serious failings" in the way the big four sold specialist loan insurance to small businesses. These, often complex, products, known as interest rate swaps, were designed to protect borrowers from rising interest rates on their loans.
Some literally just provided a cap on the upper level of interest that would be paid on a loan while other, much more complicated derivatives such as structured collars, fixed interest rates within a band but introduced a great deal more uncertainty for the borrower.
As with the payment protection insurance scandal - which has already cost the banks millions - the FSA found banks guilty of poor sales practice, in this case failing to adequately explain exit costs and check the borrower's understanding of the risks. All of these problems were exacerbated by the use of rewards and incentives for the staff selling these products.
Martin Wheatley, managing director of the FSA's Conduct Business Unit, says: "For many small businesses this has been a difficult and distressing experience with many people's livelihoods affected."
The FSA has confirmed it has reached an agreement with Barclays, HSBC, Lloyds and RBS to provide redress to affected customers. Since 2001 the FSA estimates that 28,000 interest rate protection products have been sold to small and medium sized businesses.
Wheatley adds: "I am particularly pleased that the CEOs: Bob Diamond [Barclays], Antonio Horta Osario [Lloyds] and Chris Sullivan [RBS] have provided a personal assurance that they will have responsibility for oversight of this work and will ensure that complaints are treated fairly."
The news brings to an end a bad week for the banks.
On Thursday bank shares tumbled following the announcement that Barclays had been fined £290 million by the FSA and US authorities for fixing the interest rates at which banks lend to one another. More banks are believed to be under investigation, with the Barclays' case representing only the tip of the iceberg.
Despite calls for his resignation, Barclays CEO Bob Diamond was standing firm on Friday morning.
In an open letter in which agreed to provide evidence to the Treasury Select Committee he said the abuse was limited to small number of traders. "These traders had no way of knowing whether or not their actions would ultimately benefit or detriment Barclays overall. They were purely operating for their own benefit," he said.