IF Gordon Brown and his chancellor, Alistair Darling, press ahead with changing the tax status of nondomiciles we will look back in two years and see it has had the same damaging repercussions as that suffered by New York following the clumsy introduction of Sarbanes-Oxley.

Sarbanes was a heavy-handed response to ensure that corporate America did not fall victim to another Enron scandal. Chief executives were made to personally sign off on their accounts and spend millions of dollars in extra legal and accountancy fees to cope with onerous reporting rules. As a result, corporates moved out in their droves and London won.

Tinkering with nondom status does not involve touching companies, it is instead a money-raising venture to tap the deep pockets of the super-rich who have chosen to live in Britain. Their presence has helped turn our capital into one of the most vibrant financial centres in the world. But the impact of tax changes means London will lose in the same way as the Big Apple did.

Even Ken Livingstone, London’s left-wing mayor, understands that nondoms are a necessary evil. For those not familiar with nondoms, let me briefly explain: they are UK-based overseas individuals who don’t pay tax on earnings outside this country. This has turned Britain into a Monaco for the world’s elite. And as a result thousands have based their business activities here.

Brown’s government has been one of the principal beneficiaries. Their presence has helped generate billions of pounds in tax from City-based businesses.

But Brown now appears to see nondoms as a soft target. They are not vote winners and a large part of the population resents their special tax status.

He wants to sting them with a £30,000 annual payment and have transparency and disclosure over all their overseas earnings (for details read the article on the opposite page). The inept way with which he has gone about it threatens to make hundreds of individuals quit London. They don’t mind paying £30,000 but they don’t like disclosure.

The tax will also hurt those lower down the City pay scale. For many young investment bankers overseas, who earn between £100,000 and £200,000, London is top of their list of places to work. Now they are having second thoughts.

At a recent lunch in Davos during the World Economic Forum, I asked David Miliband, the foreign secretary, why the government was tampering with the tax law. I can’t repeat his reply because it was off the record. But to summarise, he didn’t have one, and spluttered a few meaningless sentences about equality.

Brown should listen hard to the sheer scale of opposition that is building against this. It is not a difficult problem to fix. Scale the one-off payment to target the very wealthy, dump disclosure and rebuild trust to show this is not creeping legislation. If he doesn’t, he risks a slow exodus of financial and intellectual talent, from hedge-fund managers to bankers and industrialists.

What Brown has to understand is that most of them don’t want to leave. Who wants to live in Zurich or Geneva, Monaco or the Bahamas? In some parts of Switzerland you are not even allowed to mow the lawn at the weekend. London is a world-class city, but changing the status of nondoms could undermine one of our few successes – and one that we must protect at all costs. This is a call for expediency.

London is now top of a competitive league table. We are winning, but don’t underestimate how rival financial centres are trying to woo our talent.

Activist pacified

IT is interesting to see the temperature lower between Knight Vinke Asset Management, the shareholder activist, and HSBC, the £86 billion bank in which it has built a small stake. What started as a strident public campaign by the activist to expose HSBC’s strategic shortcomings has been replaced by a more conciliatory tone.

Knight Vinke has been placated by the actions taken by Stephen Green, the bank’s chairman, which have spoken louder than his words. Green and Simon Robertson, his senior nonexecutive director, have changed the make-up of the executive board. Vincent Cheng, the chairman of its Asian business and a highly respected individual, has been promoted. This was one of the activist’s central criticisms, that despite its strength in Asia, that part of the world had no representation on the executive board.

Knight Vinke built a big case at the beginning of its campaign, saying the share price was grossly undervalued. That is still the case, but against the backdrop of the sub-prime crisis, there is an acceptance that a little patience may be required.

Green, as we report on page one, has also gone out to consultation with a more demanding executive pay scheme. The last piece of the jigsaw is how HSBC will exit Household, its troubled American banking business. This was an acquisition that exposed HSBC to a Hispanic client base in Florida and California which is feeling the full brunt of being sold mortgages they can no longer repay. It john.waples@sunday-times.co.uk could cost HSBC a further $10 billion in write-offs before it can exit the business.

What both Green and Knight Vinke appear to be united on, is that its mature western banking businesses are holding back a rerating of HSBC. Asian banks are trading on p/es in excess of 20, while HSBC is down at 10. Green is changing HSBC and there is more to be done, but he has tempered an activist that threatened to make it a bruising process.

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