Bank customers come looking for payback

London Briefing:It's bank-bashing time again, as the reporting season gets into full swing with figures from Barclays yesterday and Lloyds TSB due to report on Friday.

In total, Britain's banks are expected to make record profits of over £40 billion (€60 billion) for 2006, up from around £33 billion in 2005, despite mounting bad debts from consumers unable to repay their loans.

The friendly neighbourhood bank manager is but a distant memory in Britain, where customers are dealt with instead by overworked and underinformed call centre staff, often thousands of miles away.

But the longtime love-hate relationship between the banks and their customers has taken a dinstinct turn for the worse recently with up to one million people now said to have joined an unprecedented revolt against bank charges.

At the heart of the revolution is a ruling last year by the Office of Fair Trading (OFT), which said penalty charges imposed by credit card companies on late payments were illegal. The OFT also made clear that it was taking a close look at similar penalties imposed by the banks and is expected to make a similar ruling shortly.

Encouraged by internet-based consumer sites such as moneysavingexpert.com, customers are taking action against the banks in their thousands, successfully reclaiming the illegal charges by threatening to take the banks to court.

According to some estimates, the big banks took as much as £4.7 billion in illegal charges from customers last year and, if the revolt continues to gather pace, a large proportion of that will be handed back.

Customers should not be too jubilant, however. While Barclays boss John Varley yesterday restated his commitment to free banking, the banks have a habit of having the last word. They are also very inventive where charges are concerned.

So, while customers may no longer be stung with late- payment charges, it's a near certainty that they will be made to stump up in some form in the near future as the banks make up their lost revenue.

Unions go to war with private equity

Even more unpopular than the banks, which is quite an achievement these days, are the private equity players.

Currently circling the supermarkets group J Sainsbury, among others, private equity firms are coming under increasing scrutiny outside the City, where their reputation as the "barbarians at the gate" (following the title of the book on the $30 billion takeover of Nabisco in 1989) is doing them no favours.

Unions have long loathed the private equity industry, accusing it of "asset stripping" as they pile debts on their targets and throw thousands out of work. They cite heavy job losses at recent private equity acquisitions, such as the Automobile Association and foods group Birds Eye.

The high-profile move on Sainsbury's has fuelled the union campaign, with the GMB union demanding that the chancellor, Gordon Brown, put an end to the tax relief allowed on interest payments on the loans used by the industry to fund their deals.

There was support for the increasingly demonised industry this week from a surprising source, as Britain's biggest charity, the Wellcome Trust, waded into the debate with a warning that any change to the tax treatment of the industry would lower the trust's investment returns.

This, it said, would have a knock-on effect on its donations to medical research and could also force the trust to withdraw more of its investment from the UK.

The trust's chief investment officer, Danny Truell, pointed out that returns from private equity funds have been behind a huge increase in its charitable spending, which totalled £484 million last year, most of which was spent in the UK.

If the tax treatment of the industry were to be changed, its investment returns would suffer, he warned.

Meanwhile, the normally secretive private equity industry is fighting back. In an unusually public move, the head of one of its most powerful players, Damon Buffini of Permira, has requested a meeting with the general secretary of the GMB in which he says he wants to "set the record straight" on these accusations.

Buffini has been the subject of a personal campaign by union activists, who last year paraded a camel outside his local church in Clapham, brandishing placards proclaiming: "It is easier for a camel to go through the eye of a needle than for a rich man to enter heaven."

The industry has certainly made many of its players extremely wealthy. But even among the City of London's professional investors, there is a growing disquiet about the huge sums amassed by private equity players at the expense of other shareholders.

In the case of the department stores group Debenhams, for example, a private equity consortium bought the business for £1.7 billion only to refloat it just two years later after having taken out cash of £1.3 billion and loaded the business with more than £1 billion of debt.

Those in the retail industry say the stores chain is a shadow of its former self and its shares, floated at 195p last summer, are currently trading at around 163p.

Debenhams is increasingly highlighted as a shocking example of how the private equity industry amasses huge profits in double-quick time without actually doing anything to benefit the business, although private equity firms argue that they play a useful role in cutting out the fat and increasing efficiency of their target companies.

There is an element of sour grapes among institutional investors, however. They realised too late that they sold their Debenhams shares to private equity too cheaply.

Now, with the price languishing below the float terms, the penny has dropped that they also paid too much to buy them back.

Fiona Walsh writes for the Guardian newspaper in London.