- The FSA said Barlcays sold about 40,000 derivatives to "non-sophisticated" customers since 2001
- Interest rate derivatives are supposed to protect businesses against rising interest rates
- Britain's biggest lenders have already set aside about £12bn to cover compensation for customers
Barclays increased the amount of money it must set aside to cover mis-sold financial products to consumers and business by more than £1 billion ($1.57 billion), greatly increasing expected legal payouts for the British banking sector.
The bank said on Tuesday that it was doubling the money set aside for redress on the mis-sale of interest-rate hedges to £850m.
It is also to increase the pool of money to pay off those who were sold payment protection insurance by a further £600m.
The additional provisions mean Barclays now expects a total bill of more than £3.4bn related to the mis-sale of consumer products.
The Financial Services Authority ordered Britain's top four banks -- Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group -- to review all their sales of interest rate hedging products, including swaps and more complicated instruments, last Thursday.
The four banks had until now set aside just £700m as likely compensation to customers for the products, but that figure is now likely to be revised significantly higher.
Interest rate derivatives are supposed to protect businesses against rising interest rates. But in a pilot study of 173 interest rate products, the FSA found that nine out of 10 products sold to small and medium-sized businesses by the four banks failed to meet regulatory requirements and that a "significant" portion of customers should receive compensation.
The FSA said banks had sold about 40,000 derivatives to "non-sophisticated" customers since 2001.
Britain's biggest lenders have already set aside about £12bn to cover compensation for customers who were mis-sold payment protection insurance. In addition, Barclays and UBS have paid nearly £1.3bn in penalties related to the Libor scandal, while RBS is expected to settle shortly with US and UK authorities.
Barclays announced the departure of its finance director, Chris Lucas, and general counsel Mark Harding on Sunday, in the latest sign of pressure piling on the bank's top management amid the mis-selling scandals and a probe into the lender's capital-raising efforts at the height of the financial crisis.
The Financial Times revealed last week that the FSA and the Serious Fraud Office were investigating whether Barclays provided a loan to Qatar to fund its cash call in 2008.