The Treasury Select Committee has urged Clydesdale Bank to overhaul its redress scheme for unregulated complex loans, taking it to task for "lack of public oversight, minimal transparency and limited coverage".

The powerful all-party committee of MP turned its attention to the sale of unregulated complex business loans last year following a campaign by the Bully-Banks group and the NAB Customer Support Group, representing Clydesdale and Yorkshire Bank customers.

The committee said David Thorburn, recently departed chief executive at the Clydesdale, had admitted in evidence to MPs that the bank's Fixed Rate Tailored Business Loans (TBLs) had been devised "to avoid requirements imposed by the regulator on the sale of a regulated product".

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It concluded: "Clydesdale created a product that retained the risks and complexities of the regulated product, but had none of the safeguards."

The report went on: "It appears that the bank did not explain the potential scale of break costs in a low interest rate environment because the bank itself had not taken into account this potential risk. The sale of TBLs has led to considerable consumer detriment. The bank's failure adequately to assess the potential risk of its product may explain the detriment that the bank has caused to its customers, but does not excuse it."

While 30,000 regulated interest rate hedging product (IHRP) loans fell within the scope of the review just concluded by the banks and the FCA, some 60,000 unregulated fixed rate loans with almost identical features sold by the same banks had been excluded.

Of some 10,335 complex loans sold by the Clydesdale and Yorkshire banks, only 2,172 were reviewed by the bank for possible mis-selling, with all fixed rate TBLS excluded and put on a voluntary complaint basis. Only 550 customers had complained and only 60 per cent of those might receive redress, the bank admitted under questioning from MPs.

The committee said: "The lack of public oversight, minimal transparency and limited coverage of the scheme mean that the committee cannot be confident that Clydesdale's separate internal review will deliver outcomes equivalent to the FCA review upon which it is intended to be based. If Clydesdale's aim is to build public trust in its actions, it should address all three of these problems."

Barry Gardner, spokesman at the Clydesdale, said the bank would consider the report carefully. He went on: "We are confident that our review of complex Tailored Business Loans is completely in line with FCA guidance and the outcomes we reach in considering complaints takes into account the findings from the Financial Ombudsman Service. Nevertheless, we will consider if there is more information that we can publish about our reviews in light of the committee's comments."

The MPs' report says the FCA has consistently maintained that its redress process has worked as intended and been fair, but there had been many complaints to the contrary. The FCA should now establish whether there were systemic failures in the review, publish its findings and a summary of the complaints it had examined, and "take any action it decides is appropriate to ensure that all customers receive fair and reasonable redress". In particular it should re-examine the "arbitrary" test which excluded 12,000 firms as being "sophisticated", which the committee suggests "may have been necessary to obtain agreement to a voluntary scheme from banks".

The committee also urged the FCA's ongoing inquiry into RBS's treatment of distressed customers, notably through its Global Restructuring Group, to be comprehensive, "so that the public can be confident that any wrongdoing is identified and resolved". It said the bank's own inquiry, from its lawyers Clifford Chance, "was not independent, was based on narrow terms of reference, and left a number of questions unanswered, such as why GRG could not explain the size of fees it had charged, and the accuracy of its asset valuations".

On the overall findings from its inquiry into the SME lending market, the committee says: "There is currently little evidence to suggest that new entrants in the SME finance market and existing measures to improve competition will deliver the transformation in competition that the industry needs."