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The City regulator wants to widen access to the Financial Ombudsman Service, enabling more firms to act if they feel badly treated by banks.

An additional 160,000 small firms would be able to use the service, the Financial Conduct Authority (FCA) says in a consultation document.

Currently, only individuals or firm with fewer than 10 staff can use the Ombudsman to settle financial disputes.

Under the FCA proposals, firms with up to 50 staff could use the service.

Larger businesses will still have to use the courts to settle disputes.

Launching a consultation into the idea, the FCA said there needed to be an effective dispute resolution mechanism for businesses.

"Our evidence suggests some small businesses currently find it hard to achieve a fair outcome in disputes with financial services firms, because court action is not a realistic option for them," said Andrew Bailey, the FCA's chief executive.

"We have considered what could be done within our powers and the remit of the Financial Ombudsman Service to improve this situation and are proposing to expand access to the Ombudsman."

The news was welcomed by some small businesses.

However, MPs on the All Party Parliamentary Group (APPG) on Fair Business Banking said many firms would still not get access to justice.

They suggested a tribunal system to deal with disputes instead.

The extra protection is designed to help prevent scandals like the one that engulfed the Royal Bank of Scotland (RBS) and a former HBOS division of Lloyds based in Reading.

Between 2005 and 2013, as many as 16,000 small business customers were mistreated by RBS, according to a report written for the FCA.

After falling into financial difficulty, their accounts were transferred to the bank's Global Restructuring Group (GRG).

But instead of getting the help they needed, some were asked to pay higher fees, while others saw the interest rates on loans increase.

RBS has since apologised and set up a fund of £400m to compensate those who were affected.

The news was welcomed by the Federation of Small Businesses (FSB).

"Until now, many small businesses facing mistreatment by their bank have been between a rock and a hard place - too big for the Financial Ombudsman, but not big enough to hire a legal team and go to court," said Mike Cherry, national chairman of the FSB.

"The proposals to beef up the Ombudsman are very welcome, and we will be feeding into the consultation, in the hope that it will lead to real protection for those small businesses stuck in the middle."

Getting such protections in place was the only way to prevent another banking scandal, Mr Cherry added.

A spokesperson said the Treasury welcomed the FCA's consultation and would "carefully consider its findings".