Special Report: UK banks say 'smart' clients don't deserve compensation

Tue Nov 25, 2014 6:04am EST
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By Matt Scuffham

LONDON (Reuters) - Scott Wotherspoon runs a small tiling firm in Scotland. In 2008, when he bought a shopfitting company, he asked his accountants to check its books. There was no problem with the shopfitter. But Wotherspoon was about to run into trouble with his bank.

The 43-year-old borrowed about $4 million from Royal Bank of Scotland. As part of the transaction, the bank insisted he buy a hedging product, a kind of insurance policy, so he could keep repaying the loan even if interest rates rose. If interest rates fell instead of rising, that would cost extra - which Wotherspoon alleges the bank did not explain. He thinks he is due compensation for mis-selling, like thousands of other businesses that Britain's financial watchdog has ruled are eligible.

But Wotherspoon now faces a second blow: The regulator won’t look at his claim because his company is now too big. His story shows how businesses which may have suffered because of bank misbehaviour face a new wave of frustration. First, their banks sold them financial products few could understand. Now, the banks say some of their customers should have known better.

Scandals of all sorts have already cost Britain's four main banks more than 36.5 billion pounds ($57 billion) in fines since 2009, according to CCP Research Foundation, which examines ethical issues in organizations. Earlier this month, the Financial Conduct Authority, the main UK financial regulator, levied the biggest fine ever on UK banks for manipulating the foreign exchange market.

The scandal that hit Wotherspoon’s tiling firm involved financial products known as swaps. In 2012, the regulator, the Financial Conduct Authority (FCA), found "serious failings" in the way banks had sold the swaps to small firms. It set up a compensation scheme and ordered the banks to review nearly 30,000 potential victims. Like thousands of other firms, Wotherspoon’s was deemed ineligible for compensation – in his case, because his firm was ruled to be too big, or financially “sophisticated,” and should have understood what it bought.

Swaps are a form of financial derivative – products Warren Buffet once called “financial weapons of mass destruction.” Though they are regularly used by big firms, the FCA said in its ruling that banks should not have sold them to small companies. Such firms aren't sophisticated enough to understand them, the FCA said.

That question of sophistication is at the center of Wotherspoon’s case.

When Wotherspoon took out his loan, and bought the swap as required by RBS, his firm, Tilecraft, was small.   Continued...

A maintenance worker cleans the entrance area of the headquarters of the new Financial Conduct Authority (FCA) in the Canary Wharf business district of London in this April 1, 2013 file photo. REUTERS/Chris Helgren/Files