Victims of bank fraud criticise Britain's financial watchdog

LONDON (Reuters) - Britain's financial watchdog faced sharp criticism on Wednesday from former small business owners who say they have been mistreated by big banks.

Responding to questions from the influential Treasury Committee, the ex-business owners said the Financial Conduct Authority (FCA) was ill-suited to handle serious complaints against the lenders it regulates.

The questioning centred on how small firms could be protected in future and came ahead of a parliamentary debate on Thursday on redress for victims of banking misconduct.

Asked what would have been the best course of action following the regulator's investigation into malpractice at the Royal Bank of Scotland <RBS.L>, Nikki Turner said: "Sack the FCA and start again."

Turner helped uncover one of the largest financial frauds in Britain at the Reading branch of HBOS, a unit of Lloyds Banking Group <LLOY.L>, after it destroyed her family firm, and she now heads small business group the SME Alliance.

She said the FCA's objective to protect market integrity could prevent it from properly fulfilling its other remit - to protect consumers.

Turner's comments added to criticism of the FCA over the way it dealt with allegations that RBS pushed thousands of struggling firms into bankruptcy.

The committee went head to head with the watchdog last year over its reluctance to publish a confidential report it had commissioned into the RBS scandal.

Lawmaker Martin Whitfield, who will lead Thursday's debate in parliament, said in a statement that the government must force the FCA to pass the next phase of the investigation into RBS on to an independent body.

"I do not believe the FCA can allow an investigation of this magnitude to be taken in-house," he said.

A spokesman for the FCA said it aims to make markets work well for individuals, businesses large and small and for the economy as a whole, and that it supports the committee's inquiry into the issues facing small firms.

"Over the past few years we have secured billions of pounds in redress for SMEs and consumers and where we see breaches we have, and will, take tough action."

(Reporting by Emma Rumney; Editing by Susan Fenton)