A group of MPs is stepping up a legal fight over the City regulator’s decision not widen a compensation scheme for businesses that were mis-sold billions of pounds of loans by some of Britain’s biggest banks.

Sky News understands that the All Party Parliamentary Group on Fair Business Banking sent a letter before action to the Financial Conduct Authority (FCA) on Tuesday to seek a judicial review of its handling of the redress programme.

The APPG’s move had been expected, but nonetheless marks a rare step by a group of parliamentarians in attempting to overturn a regulator’s decision.

More than £2bn was paid out by lenders including Barclays, HSBC and Lloyds Banking Group for mis-selling interest rate hedging products (IHRP) after 2001.

However, the FCA opted to exclude so-called ‘sophisticated’ customers from the scope of the scheme – a decision that the APPG said let banks off the hook to the tune of up to £10bn.

An independent review of the handling of the issue by the FCA and its predecessor body found flaws in its determinations, calling them an “inadequate regulatory response”.

The probe by John Swift QC cost more than £7m, but failed to persuade the FCA to reverse its verdict, with the watchdog saying it would “not seek to use its powers to require any further redress to be paid to IHRP customers”.

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The APPG described the FCA’s approach as “disappointing and obscure”.

Kevin Hollinrake MP, co-chair of the group, said: “What is frustrating is having a full independent review which took 30 months to complete at significant cost and then immediately dismissing the central recommendation that it was wrong to exclude 33% of all potential claims.

“The regulator cannot produce any evidence to support the decision or even remember what the reasons were for excluding so many victims; meanwhile they cleared the way for banks to knock up to £10bn off their compensation bill.

“The FCA now knows that the eligibility criteria did not achieve its objective and now the regulator needs to step up and deliver fair and effective redress for those left out in the cold.”

An FCA spokeswoman confirmed on Tuesday that it had received the letter before action, which was served by Hausfeld, the law firm.

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