The Royal Bank of Scotland has admitted to mis-selling loans to small business owners through a scheme that was originally designed to help struggling firms with obtaining credit.
RBS, which is 81% owned by the taxpayer, revealed its own review of the Enterprise Finance Guarantee (EFG) scheme showed the programme was not properly explained to borrowers.
"Following discussions with the British Business Bank (BBB) – the body established by government that manages the scheme - the bank decided it was appropriate to examine a sample of EFG customer files.
"This exercise identified a number of instances where we have not properly explained to customers how borrower and guarantor liabilities work under the EFG scheme.
"We will now be implementing a thorough and proactive review of affected and potentially affected customers to ensure they are put back in the position they believed they would have been in."
RBS said it has so far lent nearly £1bn to 9,000 SMEs since the EFG scheme began in 2009.
EFG, was designed to provide a 75% government guarantee to lenders to encourage them to support SMEs when they did not meet the regular requirements to obtain a standard bank loan.
RBS said the Financial Conduct Authority has been informed of the issue and it is contacting around 1,800 EFG loans customers that either defaulted or found themselves in a "stressed" financial position.
"EFG is a hugely important scheme that has helped many businesses continue to trade today [15 January]," said Alison Rose, CEO commercial and private banking at RBS.
"This is why it is so important that our staff adhere to the highest standards to ensure that customers fully understand the features of the product. I am not satisfied that we have met those standards in all cases."