MPs have conceded that the financial regulator is powerless to protect businesses who were mis-sold loans with only an indirect link to a complex market derivative.

The Treasury Committee has published a legal opinion on the so-called 'embedded swap' loans, which were sold to up to 60,000 mainly small and medium-sized businesses.

The Herald revealed in November that the opinion backs up the stance of the Financial Conduct Authority that the loans are outside its remit.

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Now committee chairman Andrew Tyrie has said: "After taking legal advice, the FCA concluded that its limited powers in this area prevent investigation of loans with 'embedded' IRHPs. This was a blow to thousands of firms who feel that they have been mis-sold these complex products. That is why, on behalf of the Treasury Committee and with the help of an independent legal adviser, I have checked this out. Jonathan Fisher QC's opinion supports the FCA's conclusions on this point."

Mr Tyrie went on: "The committee will be considering whether more needs to be done to address this gap in regulation as part of its report on SME lending. It is crucial to the UK economy that this market be restored to working order."

Some 17,000 loans directly linked to derivatives, known as 'standalone' interest rate hedging products (IHRPs), have been reviewed since 2012 by banks, who have so far paid out £1.8billion to 11,000 SMEs. A further 3,000 claims were rejected, while around 13,000 were excluded as coming from so-called "sophisticated" customers.

But Martin Wheatley, chief executive of the FCA, has admitted that embedded swap loans carried the same mis-selling risks as standalone IHRPs, a point conceded by Clydesdale chief executive David Thorburn when he was called to give evidence to the Treasury Committee on the issue last June. Since then Clydesdale has set up its own review of such loans, though only at a customer's request.

Campaign group Bully-Banks has said mis-selling is "a conduct issue" so the FCA could decide to act.

Mr Tyrie went on: "The committee is also concerned about the effectiveness and transparency of the FCA's redress scheme for 'stand-alone' IRHPs. This issue is likely to be raised with the FCA when Martin Wheatley and (chairman) John Griffith-Jones give evidence on Tuesday. SMEs that may have been mis-sold these complex products need to be confident that banks will deliver prompt and fair redress through this scheme."