Announcing the result of the pilot redress scheme this morning, the FSA said that more than 90% of the 173 sales it looked into did not comply with at least one or more regulatory requirement.

It added that a "significant portion" of these 173 cases were likely to result in redress being due to the customer, although it warned that the small number of "typically more complex cases" in the sample might not be representative of all interest rate swap sales.

The four banks involved in the pilot, Barclays, HSBC, Lloyds and RBS, will now start the full review of their sales, in cooperation with their independent reviewers, who the FSA praised for "ensuring the outcomes for customers are fair and reasonable".

"We saw evidence of the independent reviewers challenging the banks' decisions both on whether sales complied with regulatory requirements and on redress," the FSA said in its report. It added that where there was a disagreement between the bank and the independent reviewer on the outcome of a case, the reviewer's conclusion would prevail.

The Federation of Small Business (FSB) welcomed the findings but demanded "swift and decisive action to compensate the businesses caught up in the mis-selling scandal", including the suspension of all interest rate swap payments (which businesses have been required to continue making despite the FSA's announcement of the mis-selling scandal in June 2012) and the establishment of a clear route of appeal.

FSB national chairman John Walker said: "The FSA's report into mis-selling highlights the seriousness of the situation finding that 90% of loans were mis-sold. This is alarming, but will come as a relief to the thousands of small firms who have been anxiously waiting for an outcome on this very complex situation. We welcome the work that the FSA has done to date and that it has listened to our concerns around how it defines a sophisticated business.

"However with the pilot showing such a significant level of mis-selling we are concerned that the FSA has not mandated that all payments are suspended when a firm enters into the scheme – we would like the banks to do this for their customers. There is also a lack of clarity on what full redress looks like, with banks determining what constitutes consequential losses, and how an appeals process will work."

Companies eligible for redress need to fulfill at least two of the three "sophistication test" criteria, which include: a turnover of less than £6.5m; a balance sheet total of less than £3.26; less than 50 employees.

The FSA has added a few exceptions to these criteria to allow businesses with large seasonal workforces and small businesses with large balance sheets (by virtue of owning property, land and/or machiner) to be included.

Three tiers of redress have been established by the pilot, including Full Redress, Alternative Product and No Redress. In the case of Full Redress, where it is deemed that the customer would not have purchased any interest rate hedging product (IRHP), the bank will provide an exit from the IRHP at no charge, a refund of all payments, including any break costs previously paid.

Customers who are deemed likely to have bought an alternative IRHP had they not been mis-sold their existing one will be switched to the alternative product and refunded any difference in payments between the alternative product and the product purchased, including the difference in any break costs previously paid.

The alternative product will be simple (e.g. a cap, vanilla swap or vanilla collar) and will not have break costs in excess of 7.5% of the amount hedged at the point of sale.

No redress will be applied if it is deemed likely that the customer would have bought the same product if the sale had complied with regulatory requirements.

The FSA has confirmed that the other six banks that mis-sold IRHPs will be able to launch their reviews by 14 February.