Britain's big four high street banks could be forced to pay millions of pounds in compensation to small businesses, after the main City regulator found they mis-sold complex insurance products in more than 90% of cases.

The Financial Services Authority (FSA) said the banks would conduct a review of small business accounts to determine the extent of the mis-selling, which dates back to 2001.

As many as 40,000 so-called interest rate swaps could have been mis-sold to small businesses in the latest scandal to hit the banking industry.

But the regulator backed away from demands from small business groups that banks be found be considered guilty unless they can prove their innocence, following a precedent set by the mortgage endowment and payment protection insurance scandals.

The regulator has already forced banks to pay more than £10bn in compensation and admin costs following the mis-selling of payment protection insurance, and is conducting an inquiry into the full extent of the Libor interest rate setting crisis.

MPs and peers on the Banking Standards Commission attacked banks on Wednesday for maintaining sky-high bonus payments to senior staff, despite the succession of mis-selling scandals that have cost customers billions of pounds and undermined the industry's reputation.

The shadow business secretary, Chuka Umunna, welcomed the ruling, which he said underlined the need to reform the industry. "The degree to which swap mis-selling to SMEs was found to have occurred underlines the need for a cultural change in the banks," he said.

Business secretary Vince Cable said the scandal was an example of "the little guy paying for the big banks' wrongdoing". "Malpractices like this have no place in Britain's business environment, which we are committed to making one of the best and fairest in the world," he said.

"The immediate priority is to ensure small businesses are not driven out of business by banks pursuing liabilities for swaps that they mis-sold."

Small business lobby groups warned that businesses would be made bankrupt unless the regulator insisted on a speedy resolution.

John Walker, chairman of the Federation of Small Businesses, said sky-high insurance payments also needed to be suspended and a more open assessment of compensation payments after banks were given the job of determining what constitutes a consequential loss.

"What is clear is that firms will need expert support when they enter the scheme to ensure they receive the redress they deserve," he said.

The FSA said it found that, in the 173 test cases examined in the study, more than 90% of sales did not comply with at least one or more regulatory requirements.

Three of Britain's biggest banks – Barclays, HSBC and Royal Bank of Scotland – have already set aside about £630m to cover the cost of potential mis-selling claims, and the upcoming round of annual results will reveal the latest provisions in the industry. Lloyds has yet to make a statement on potential costs.

Allied Irish Bank, Bank of Ireland, Clydesdale and Yorkshire banks, Co-operative Bank, and Santander will hear in the next couple of weeks whether they must also conduct reviews.

The FSA said a significant proportion of the cases would result in compensation being due to the customer.

The products were marketed as low-cost protection against rising interest rates, often as a condition of a business loan, but left firms facing huge bills if rates fell. Firms also faced hefty penalties to get out of the deals, which many said they were not told about.

Banks have been working with the FSA to begin the compensation process and have launched pilot reviews of some 200 alleged cases to assess if mis-selling took place and potential compensation.

Martin Wheatley, chief executive designate of the Financial Conduct Authority, which will take over from the FSA later this year, said: "This marks significant progress in our review of these products. We believe that our work will ensure a fair and reasonable outcome for small and unsophisticated businesses.

"Small businesses will now see the result of the review as the banks look at their individual cases. Where redress is due, businesses will be put back into the position they should have been without the mis-sale. But it is important to remember that this review is firmly focused on the particular circumstances of each sale. These will determine whether there were failings in the sales process and, if so, whether redress is due."