Cheapest tickets on LHR-MAD return are £332 (I class, 7 day trip) which, based on today's exchange rate is 403 EUR.

Cheapest tickets on MAD-LHR return is 1008 EUR, however this is in D class

It seems that BA do not offer I class (substantially reduced CE ticket prices from the sale point of MAD) So if one was not connecting onto a LH flight, then there would be no way of getting a cheap I class sector on this flight as BA don't offer them just for MAD-LHR returns.

Taking away the more expensive fare bracket (I is cheapest at a UK POS, D is offered as cheapest from MAD POS), airlines do this for a reason. It would seem that IAG would like MAD originating pax to use IB. Their cheapest fares start at 667 EUR for their J-class product. There obviously is more demand for the BA CE product and BA are charging the price that they think they could get away with.

Note that from other Spanish airports (and European airports in general), you will find the reverse can often be true (I.E with BCN-LHR returns in CE starting at 344 EUR). It simply is because MAD is IB's hub and both are within IAG so they can choose to diversify profit.

In general a stronger £ will hurt BA as well (which has been the case recently), therefore European fares will want to rise (however this is not often the case as BA must stay competitive so BA generally takes a cut from its bottom line when the £ is high).

I'm of course using an educated guess and ITA matrix to come to this hypothesis but I'd think it was quite likely I am correct. In a way, yes it ois unfair but it is general practice.