* Committee recommends independent oversight of review
* Says FCA must demonstrate process credible
* Says Treasury can require work to be done (Adds further comments from Committee chairman)
By Matt Scuffham
LONDON, March 10 (Reuters) - Britain's financial regulatorshould set up an independent review of its compensation schemefor customers who were mis-sold complex hedging products toensure it does not favour banks, a committee of lawmakers said.
The Financial Conduct Authority (FCA) agreed the terms of ascheme to compensate thousands of small companies that weremis-sold the products, know as interest rate swaps, in 2012,with nine banks including Royal Bank of Scotland, LloydsBanking Group, Barclays and HSBC.
But the scheme quickly attracted criticism with more than athird of businesses excluded from the scheme because they weredeemed to be "financially sophisticated" and many of the firmsthat were allowed into it offered alternative hedging productsby banks rather than cash compensation.
The products were meant to protect firms against risinginterest rates, but when rates fell the companies had to payextra charges, typically running to tens of thousands of pounds.They also faced hefty penalties to extricate themselves from thedeals, which many said they were unaware of.
"It is far from clear that the FCA's scheme has deliveredfair and reasonable redress to all the businesses affected,"said Conservative lawmaker Andrew Tyrie, who chairs parliament'sTreasury Committee, which monitors Britain's finance ministry aswell as the Bank of England and FCA.
"The FCA needs to do much more to demonstrate that thisprocess is credible and has not unduly favoured the banks,"Tyrie said in a report on conduct and competition in smallbusiness lending published on Tuesday.
The Committee said the FCA "should collect the informationnecessary to establish whether there are systemic failures inthe review". It said that process would benefit from independentoversight and the FCA should publish its findings.
"The Financial Services Act provides for the Treasury torequire for this type of work to be done. But hopefully thiswon't be necessary," he added.
The committee also recommended that an investigation intothe banking sector by Britain's competition watchdog examineswhether structural reform of the industry is needed to boostcompetition.
It also said the Competition and Markets Authority shouldassume responsibility for making an annual judgement on whetherthe regulator is fulfilling its duty to promote competition inthe industry.
Lawmakers are keen for new banks to emerge to break thedominance of Barclays, HSBC, Lloyds and RBS, which provide nineout of every 10 business loans.
(Editing by Sinead Cruise and Susan Thomas)