The warning by Martin Wheatley, chief executive of the Financial Conduct Authority, was given in two letters to former treasury minister Greg Clark in February and May this year which have only just been released by the Government.
The Herald revealed last February that the Clydesdale Bank's most widely-sold fixed-rate loans would fall outside the review of swap-related loans, despite having "embedded swaps" that penalised businesses in a similar way.
The bank has always denied that its fixed-rate tailored business loans are linked to derivatives, but Mr Wheatley's letter says such loans have "similar features to complex IRHPs (interest rate hedging products) but are embedded within commercial loan agreements".
The letter goes on: "A customer who has taken out a loan with an 'embedded' IRHP may be faced with exactly the same repayment features and exactly the same (potentially large) break costs that the customer would have faced had he taken out a loan and a stand-alone IRHP."
Mr Wheatley warns: "The size of this issue is potentially significant. Data collected from Barclays, HSBC, Lloyds, National Australia Group and RBS shows more than 60,000 fixed rate loans with mark-to-market break costs have been sold since 2001, significantly more than the 40,000 standalone IRHPs [now whittled down to 30,000] covered by our review."
Clydesdale parent National Australia Bank was treated as a peripheral bank in the review of regulated swap-related loans.
Asked how many of the unregulated loans it accounted for, a Clydesdale Bank spokesman said yesterday: "Unfortunately I can't give you any numbers as it's commercially sensitive information."
Last week, an early day motion was raised by Scottish LibDem and Treasury Committee member John Thurso, signed by 18 MPs, which calls on the Government to ensure "proper regulation in the future and that there is a review and access to redress for those affected in the past", in relation to embedded swap loans. Mr Wheatley told Mr Clark, who has since been replaced as treasury minister by Sajid Javid, that products with embedded swaps were attractive to banks. "Building such features into the loans themselves enables banks to re-introduce what are often profitable product features from their perspective, without rules in place to protect customers and no risk of regulatory sanction."
The FCA chief was concerned at firms "taking advantage" of the loophole, adding: "There is a risk that banks might consider 'embedding' all their IRHPs into commercial loans in future, and thus avoid our regulatory oversight altogether."
The letters were requested by Mr Thurso when the Treasury Committee questioned Mr Wheatley in September, but were only provided recently after a reminder to the FCA.
John Glare of the NAB Customer Support Group, said: "The enormous delay in the FCA providing copies of the correspondence to John Thurso is unacceptable."
Mr Glare added: "There are 60,000 embedded swaps against only 40,000 standalone - the embedded swap issue is therefore 150% bigger. No wonder it's been such a struggle to have it recognised by the banks."
The government said last week 18,400 sales of IRHPs to businesses had so far been reviewed and 95% of sales had been found "non-compliant". So far only 550 offers of redress have been finalised, with 438 businesses offered no redress.
A Clydesdale spokesman said: "The FCA has recognised that 'interest rate hedging products can protect bank customers against the risk of interest rate movements and can be an appropriate product when properly sold in the right circumstances' . The sale of any product must be fair and appropriate, and where a customer is concerned about the sale of their product, they can use existing complaints procedures."