By Jonathan Davies

A "significant number" of small businesses have been "treated unfairly" by a compensation scheme set-up following the mis-selling of financial products, according to a group of MPs.

The scheme was set-up after businesses were mis-sold interest rate hedging products.

And now the Treasury Committee has called for the Financial Conduct Authority (FCA) to show that the compensation scheme did not favour the banks.

"It is far from clear that the FCA's scheme has delivered fair and reasonable redress to all the businesses affected," said Committee chairman Andrew Tyrie.

"The FCA needs to do much more to demonstrate that this process is credible and has not unduly favoured the banks."

The committee also called for the FCA's review to be overseen by an independent party.

Among the demands made by MPs was asking the FCA to explain why it had introduced a £10 million cap on the value of the products. The committee said that this would leave a third of affected businesses unable to make claims. And the MPs even asked whether it was "a concession to bank lobbying".

Mr Tyrie said: "A significant number of those firms who were mis-sold these hedging products feel that, having been ripped off in the first place, they have now been treated unfairly again."

What is interest rate hedging

When the small businesses applied for loans with banks, the banks insisted that they take out insurance to protect themselves from interest rates rises. But what the businesses didn't realise is that the insurance would also protect the banks if interest rates went down.

If interest rates went up by more than one or two per cent, the insurance kicked in in the form of so-called "swap" contracts, also known as interest rate hedging products. The businesses would be protected from higher repayments if there was a sudden surge in rates.

But the businesses weren't informed that the contracts worked in reverse as well. So if interest rates went down by more than one or two per cent, it would be the business, not the bank, that paid out potentially very large amounts of money.

So when the Bank of England cut interest rates to a record low of 0.5% in 2009 during the financial crisis, many small businesses were left with huge bills and unmanageable repayments.

In 2013, the FCA's predecessor, the Financial Services Authority (FSA), found that 90% of the so-called "swap" contracts had been mis-sold and agreed a compensation scheme with nine banks, including Royal Bank of Scotland, Lloyds Banking Group, Barclays and HSBC.