The FSA said that it has reached agreement with Barclays, HSBC, Lloyds and Royal Bank of Scotland to pay redress to customers where mis-selling has occurred.
Interest rate hedging products protect bank customers from interest rate movements. Between 2001 to date, around 28,000 were sold.
Poor sales practices by banks included poor disclosure of exit costs, failing to define customers' understanding of risk, non-advised sales straying into advice and also rewards and incentives being a driver of these sales.
Martin Wheatley, managing director of the Conduct Business Unit at the FSA, said: "For many small businesses this has been a difficult and distressing experience with many people's livelihoods affected. Our work has focused on ensuring a swift outcome for these businesses that form such an important part of the economy.
"I am pleased that Barclays, HSBC, Lloyds and RBS have agreed to do the right thing by their customers and offer redress or a review of past sales. These firms have responded to the need to provide a fair deal for customers working with us, and I welcome this outcome."
This is the second scandal for Barclays this week after it was fined £59m by the FSA for manipulating rate-setting references the London Interbank Offered Rate (LIBOR) and European Interbank Offered Rate (EURIBOR).

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