Britain's financial regulator has ordered UK banks to compensate businesses for "serious failings" over the sale of complex products.

The Financial Services Authority said it had reached agreement with Barclays, HSBC, Lloyds and RBS "to provide appropriate redress" for mis-selling interest rate hedging products.

It is a fresh major blow for Britain's beleaguered banking sector in a week in which Barclays was hit by record fines for rigging interest rates.

And bailed-out Royal Bank of Scotland was unable to settle transactions for millions of customers because of an IT meltdown.

"The FSA has today announced that it has found serious failings in the sale of interest rate hedging products to some small and medium sized businesses," the watchdog said in a statement.

"We believe that this has resulted in a severe impact on a large number of these businesses. In order to provide as swift a solution to this problem as possible we have today confirmed that we have reached agreement with Barclays, HSBC, Lloyds and RBS to provide appropriate redress where mis-selling has occurred," the UK watchdog said.

The FSA said that about 28,000 interest rate protection products had been sold by the banks to customers over 11 years to 2012. "Interest rate hedging products can protect bank customers against the risk of interest rate movements and can be an appropriate product when properly sold in the right circumstances," it added.

This latest blow comes as Barclays chief executive Bob Diamond clings to his job after regulators slapped a record fine on the lender for rigging interest rates. Diamond has found himself first in the firing line after US and British authorities fined Barclays $450m on Wednesday for manipulating the London interbank offer rate (Libor).

British Prime Minister David Cameron said Diamond - who was running the investment banking arm Barclays Capital when the rigging occurred in 2005-2009 - and other bosses had some "big questions to answer". Britain also called in the fraud squad to investigate possible crimes.

Diamond, whose big bonuses following the financial crash of 2008-09 drew widespread criticism, won few political friends last year when he told a parliamentary committee that it was time for bankers to stop apologising.

Shares in Barclays slumped 15% yesterday on concern that Barclays will face lawsuits from US investors and that Diamond may go.

Diamond admitted in an open letter to Britain's Treasury Select Committee yesterday that the bank engaged in "inappropriate behaviour" to lower submissions. In his letter, Diamond said the investigation highlighted two types of manipulation used by the bank, and he would happily attend a Treasury Committee meeting on the issue.

The Libor scandal, which disclosed e-mails in which bankers appeared to promise bottles of champagne to each other for help in setting the rates, has fuelled the anger with the financial industry. Authorities in Europe, North America and Japan are investigating many banks which help to set Libor, and others are expected also to be heavily fined. Shares in RBS and Lloyds also fell sharply yesterday.