Business owners who were mis-sold interest-rate swaps suffered "a difficult and distressing experience with many people's livelihoods affected", the City watchdog said.
The FSA has spent the last two months reviewing the sale of interest-rate hedging products, talking to more than 100 customer who came forward, and found "serious failings".
Poor sales tactics were uncovered including failing to provide sufficient information on the hefty exit costs involved, failure to gauge the customers' understanding of risk and found rewards and incentives were a driver of these practices.
As well as offering redress directly for those customers that bought the most complex products, HSBC, RBS, Lloyds and Barclays have also agreed to stop marketing certain hedging products to retail customers.
Not all businesses will be owed redress, the FSA added, but for those that are, the exact redress will vary from customer to customer. This exercise will be scrutinised by an independent reviewer at each bank appointed under the FSA's powers.
Andrew Tyrie, Treasury Select Committee chairman, said the committee would be looking at the FSA's findings in more detail.
He said: "Such products took advantage of small businesses, many of which could not reasonably have been expected to understand what they were signing up to, at a time when loans were difficult to come by. This is completely unacceptable."
The FSA said it received personal reassurances from the bosses of the banks involved - including Bob Diamond at Barclays - that they will have responsibility for oversight of this work.
The British Bankers' Association, the leading trade association for the UK banking and financial services sector with more than 200 member banks, said: "Our members have been working closely with the FSA while it carries out its thematic review into interest rate swaps and will continue to co-operate fully."
John Longworth, director general at the British Chambers of Commerce (BCC), said the mis-selling claims will damage business' perception of banks further.
He said: "Many businesses look at practices undertaken by some in the financial services industry in disbelief and horror.
"Relationships between institutions that provide finance and those that receive it must be based on trust. Unfortunately, the revelations of the last week will only erode confidence in the banking system, and it will be a long road back to restore it."
A debate in the House of Commons last week saw MPs from across the country offer examples of mis-selling for the interest rate swap products.
Aberconwy MP Guto Bebb claimed thousands of businesses lost large amounts of money after being mis-sold the complex products by their banks, and many were told that without signing up they risked being refused credit.
He said many business people did not understand the deals but trusted their bank manager. In other cases, he said, businesses were offered only one product and the bank made no effort to provide a choice.
A survey by Bully Banks, which has been set up by alleged victims of swap mis-selling, found nearly three quarters of its members claim to have been forced to buy a swap by their lending bank as a condition of their loan.
In a statement, Lloyds, which set aside £3.6 billion to cover the cost of PPI compensation, said it did not expect the costs of redressing customers who were mis-sold IRSA products to be "material".
Meanwhile, RBS said: "In the case of a small number of less sophisticated customers who entered into more complex swap products we have agreed to move directly to redress.
"We believe risk management products are an essential part of corporate banking and it is important we restore customer trust in this area."
Shadow business secretary Chuka Umunna said the banks need to explain who knew about the mis-selling of interest rate swaps.
He said: "With the catalogue of wrongdoing in the British banking sector growing, the sector urgently needs to act to rebuild trust, demonstrate it understands the huge damage to its reputation and show that where there has been wrongdoing, it will ensure people are held to account."
Barclays said around 5,000 interest rate hedging products have been entered into by small and medium-sized business customers with the bank since 2001.
To date, 48 complaints have been ruled on by the Financial Ombudsman Service, with nearly 90% decided in favour of Barclays.
The bank added: "It is currently anticipated that the financial impact of remediation costs will not be material to the group."