* Compensation could run to 10 bln pounds - consultant
* Barclays, HSBC, Lloyds, RBS to begin review of cases
* RBS says will 'meaningfully' increase provision
* Banks have set modest provisions so far
* UK lawmaker urges banks to help affected businesses
By Matt Scuffham
British banks face another round of compensation claims that could total billions of pounds after the regulator found they had widely mis-sold complex interest-rate hedging products to small businesses.
The interest-rate swaps are the latest in a series of costly banking scandals that include insurance on loans and mortgages that was also mis-sold, rigged global benchmark rates and breaches of anti-money laundering rules.
Britain's financial watchdog said on Thursday it found that in the 173 interest-rate swap test cases it examined, more than 90 percent did not comply with at least one or more regulatory requirements.
A significant proportion will result in compensation being due, the Financial Services Authority (FSA) said.
Martin Berkeley, a senior consultant at Vedanta Hedging, which advises on interest-rate hedging products, said the final bill for banks could be as high as 10 billion pounds ($16 billion).
So far, the four biggest banks have set relatively small sums aside for compensation. Barclays has taken the highest provision at 450 million pounds, HSBC has set aside about 150 million pounds, RBS 50 million pounds and Lloyds has said the cost won't be material.
RBS said on Thursday that it would "meaningfully" increase the amount when it publishes its final results on Feb. 28. It will decide how much more to put aside after further talks with the regulator.
Investec's banking analyst Ian Gordon said he expected the overall bill for the industry to be around 1 billion pounds.
Banks have already set aside 12 billion pounds to compensate customers mis-sold payment protection insurance (PPI) and industry sources expect that number to double.
The rate-swap products were designed to protect firms against rising interest rates, but when rates fell they had to pay large bills, typically running to tens of thousands of pounds. Companies also faced penalties to get out of the deals, which many said they had not been told about.
Berkeley said the scandal has had a worse impact on victims than mis-selling of payment protection insurance to individuals.
"The difference between this and PPI is that people lost their homes and businesses. These products were toxic."
The FSA said Barclays, HSBC, Lloyds and RBS will review sales of the products. Customers will be contacted by