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 gave permission on Friday for a judicial review of a scheme set up by Britain's financial regulator to compensate small firms mis-sold interest rate hedging products, potentially leaving banks with a bigger compensation bill.

Judge Kenneth Parker granted an application by law firm Mishcon de Reya, which is acting on behalf of Holmcroft Properties, a nursing home operator, in a case relating to the alleged mis-selling of interest rate swaps by Barclays (LSE: BARC.L - news) .

The decision could lead to an overhaul of the compensation scheme, leading to banks facing a significantly higher bill to compensate 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 the opportunity to argue a case for appropriate compensation that is commensurate to his loss," said James Oldnall, the partner at Mishcon de Reya who led the case for the claimant.

Mishcon de Reya specifically questioned the role of so-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 reached an agreement with banks including Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland (LSE: RBS.L - news) for them to review thousands of cases for possible mis-selling.

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 FCA scheme relied on banks themselves deciding who was eligible for compensation. Banks worked with assessors, often large accountancy firms, which, while independent, were appointed by the banks themselves.

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

Parliament's Treasury Select Committee called for an independent review of the process while the Bully-Banks campaign group has also sought a judicial review.

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

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

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