UPDATE 2-UK judge paves way for judicial review of swaps redress

* Judge grants application for judicial review of process

* Decision could lead to overhaul of compensation scheme

* Banks have so far paid out $2.7 billion compensation

* Scheme has been criticised by MPs, campaigners (Adds details, comment from judge, lawyer)

By Matt Scuffham

LONDON, April 24 (Reuters) - The High Court in London gavepermission on Friday for a judicial review of a scheme set up byBritain's financial regulator to compensate small firms mis-soldinterest rate hedging products, potentially leaving banks with abigger compensation bill.

Judge Kenneth Parker granted an application by law firmMishcon de Reya, which is acting on behalf of HolmcroftProperties, a nursing home operator, in a case relating to thealleged mis-selling of interest rate swaps by Barclays.

The decision could lead to an overhaul of the compensationscheme, leading to banks facing a significantly higher bill tocompensate customers than the 1.8 billion pounds ($2.7 billion)they have so far paid out.

"From the perspective of our client, we now have theopportunity to argue a case for appropriate compensation that iscommensurate to his loss," said James Oldnall, the partner atMishcon de Reya who led the case for the claimant.

Mishcon de Reya specifically questioned the role ofso-called independent assessors in the compensation process --in this case KPMG, which is the defendant in the case.

KPMG, Barclays and the FCA declined to comment.

The FCA set up a compensation scheme in 2012 having reachedan agreement with banks including Barclays, HSBC,Lloyds Banking Group and Royal Bank of Scotland for them to review thousands of cases for possible mis-selling.

The products were meant to protect smaller companies againstrising interest rates, but when rates fell the companies had topay extra charges, typically running to tens of thousands ofpounds. They also faced hefty penalties to extricate themselvesfrom the deals, which most said they were not aware of.

The FCA scheme relied on banks themselves deciding who waseligible for compensation. Banks worked with assessors, oftenlarge accountancy firms, which, while independent, wereappointed by the banks themselves.

The process quickly attracted criticism with many smallfirms complaining that their compensation was inadequate or thatthey were offered alternative hedging products they didn't wantor excluded from the process altogether on technicalities.

Parliament's Treasury Select Committee called for anindependent review of the process while the Bully-Banks campaigngroup has also sought a judicial review.

Judge Parker said the level of public interest in the affairwas a factor in his decision.

"It is plain from everything that has been heard today thatthis matter is one of very considerable general public interest.I am not allowing the claim to proceed solely because of thatfactor but it does seem to me a factor that the court shouldtake into account," he said.

($1 = 0.6588 pounds) (Additional reporting by Huw Jones; Editing by Sinead Cruiseand Greg Mahlich)