Britain’s financial watchdog is facing legal action for allegedly failing to support thousands of individuals excluded from a £2.2 billion ($2.8 billion) bank compensation scheme, Reuters reports.

The case stems from the Financial Conduct Authority’s (FCA’s) response to an independent review of the scheme which addressed interest rate hedging products.

Nine banks, including Barclays, HSBC and Lloyds, sold products intended to protect against rising interest rates to thousands of small businesses. However, when rates dropped after the global financial crisis, customers were forced to pay additional charges.

Under the redress scheme, the banks agreed to pay compensation to customers who were mis-sold the products between 2001 and 2011. But thousands were excluded based on a "sophistication test",  which left out those with a turnover exceeding £6.5 million pounds and more than 50 employees.

An independent review commissioned by the FCA in 2021 found that the exclusion of those sales was "without proper justification,"  but the FCA chose not to take further action.

However, the All-Party Parliamentary Group argues that the FCA’s actions were unlawful, claiming there was no objective justification for the original scheme to exclude thousands of people. It further contends that many had their businesses and livelihoods destroyed as a result.

Meanwhile, the FCA maintains that the independent review specifically did not call for the watchdog to seek further redress from the banks.