The Government faces mounting calls for an inquiry into banking culture and practices after a fresh mis-selling scandal capped a nightmare week for the industry.
Bank of England Governor Sir Mervyn King launched a scathing attack on the banking industry and demanded a "real change in culture" as Britain's lenders became embroiled in more controversy.
Opposition leader Ed Miliband pushed for a probe to "shine a light" on the industry after the FSA uncovered "serious failings" in the sale of complex financial products to small businesses, just days after the rate-rigging affair emerged at Barclays.
Taxpayer-backed Royal Bank of Scotland also confirmed it was being investigated for manipulating the rates at which banks lend to each other, known as Libor.
Meanwhile, RBS boss Stephen Hester waived his 2012 annual bonus following the IT fiasco that caused major problems for thousands of NatWest customers.
Sir Mervyn said he believed a Leveson-style inquiry was not needed, but criticised conduct in the industry.
He said: "From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates and now news of yet another mis-selling scandal we can see we need a real change in the culture of the industry."
He added that hard-working bank staff have been "let down" and that banks now needed "leadership of an unusually high order".
The Financial Services Authority (FSA) revealed earlier that Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group had agreed to pay compensation to customers who were mis-sold interest-rate hedging products.
Some 28,000 of the products have been sold since 2001 and may have been offered as protection - or to act as a hedge - against a rise in interest rates without the customer fully grasping the downside risks.
Martin Wheatley, managing director of the FSA's conduct business unit, said: "For many small businesses this has been a difficult and distressing experience with many people's livelihoods affected."
The findings come after Barclays was fined £290 million by UK and US regulators for manipulating the rate at which banks lend to each other, and echoes the costly payment protection insurance (PPI) mis-selling scandal that emerged last year.
Banks are facing the threat of a criminal investigation over fixing the interbank lending figures that affect millions of homeowners and small firms.
The Treasury has started to look at strengthening criminal sanctions for those responsible for market abuse after the FSA exposed the dealings at Barclays on Wednesday.
Serious Fraud Office investigators are in talks with the regulator over the scandal, while pressure is mounting on Barclays chief executive Bob Diamond to stand down.
Cameron refused to back Diamond when asked whether heremained the right person to run Barclays. The prime minister said: "I can't say that. As I say, he has got questions to answer."
He added: "People are rightly angry about the behaviour of the banks and so am I."
However, Diamond, who was head of the bank's investment arm at the time of the allegations, remains defiant. The bank boss reportedly told a meeting of analysts at US bank Morgan Stanley that he would not resign.
The American banker, who waived his bonus for 2012 in light of the claims, has agreed to appear in front of the Treasury Select Committee to account for his bank's actions.
Miliband called for an inquiry into the industry and said it was clear that change was needed at Barclays.
The Labour leader said: "We definitely need an inquiry into the culture and practices of the industry."
HSBC and taxpayer-backed RBS are among several other lenders being investigated by the City watchdog for trying to influence the Libor and Euribor interbank lending rates to boost their profits.
Sir Mervyn said there needed to be a change in the way Libor was calculated based on "observations of actual market transactions" rather than getting banks to supply rates.
"The idea that my word is my Libor is dead," he added.
He also backed proposals to ringfence retail banking divisions from investment arms as a way of addressing some of the issues that have emerged from the most recent developments.
At RBS, Hester said that while the computer problems at Natwest were caused by issues dating back to before he arrived at RBS in 2008, it would be inappropriate to take a 2012 bonus.
The IT glitch delayed payments to NatWest, Royal Bank of Scotland and Ulster Bank accounts, leaving some customers short of cash and even forcing one man to spend a weekend in prison when his bail money was not available.
TUC general secretary Brendan Barber said Britain's banking system was "out of control".
He said: "We are now paying a heavy price for the decades when banks and finance persuaded politicians that they were the new engines of growth."
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- Serious Fraud Office May Investigate Barclays Scandal
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