By Matt Scuffham
LONDON (Reuters) - Britain's High Court on Friday granted permission for a judicial review of a scheme set up by Britain's financial regulator to compensate small firms mis-sold interest rate hedging products.
Judge Kenneth Parker granted an application by law firm Mishcon de Reya on behalf of its client Holmcroft Properties, a nursing home operator, in a case relating to the alleged mis-selling of interest rate swaps to the company by Barclays .
The decision could result in thousands of small businesses seeking higher compensation for the mis-selling of these products and leave banks facing a much higher bill than the 4.4 billion pounds ($6.6 billion) they have currently set aside.
The products were meant to protect smaller companies against rising interest rates, but when rates fell, the companies had to pay extra charges, typically running to tens of thousands of pounds. They also faced hefty penalties to extricate themselves from the deals, which most said they were not aware of.
The Financial Conduct Authority (FCA) agreed terms in 2012 to compensate thousands of customers mis-sold the products with nine banks including Royal Bank of Scotland , Lloyds Banking Group , Barclays and HSBC .
But its scheme quickly attracted criticism with more than a third of businesses excluded because they were deemed to be "financially sophisticated". Many of the firms that were included were offered alternative hedging products by banks rather than cash compensation.
Banks set aside 4.4 billion pounds to compensate customers but have so far paid out just 1.8 billion.
The FCA was not immediately available for comment.
(Additional reporting by Huw Jones, editing by Sinead Cruise)