Britain’s standing as a leading financial centre is in danger of being undermined by ill-thought-out changes to tax and regulation, the Treasury was warned yesterday by Britain’s main business group and the Association of British Insurers (ABI).

In separate warnings, the CBI and the ABI said that if the Government made hasty changes to banking regulation and pushed ahead with changes to rules on capital gains tax and nondomiciled workers, the financial services sector and the country’s reputation would be damaged.

In a speech to the City, Richard Lambert, the Director-General of the CBI, said: “The US responded to the collapse of Enron with the Sarbanes-Oxley legislation, with seriously damaging consequences for the American corporate sector. We could be about to make the same mistake.”

Mr Lambert urged restraint before the Government finalised changes to banking regulation in the wake of the collapse of Northern Rock. He said: “Ill-thought-out legislative responses to financial shocks can have very damaging consequences.” He said that a recent consultation document on banking reform “leaves a lot of questions unanswered”.

The Treasury brought out proposals to shake up the banking system in January, including plans to push depositors to the front of the queue when banks wind up. The Government also wants to introduce a £13 billion prefunded compensation fund.

Mr Lambert also renewed his ferocious attack on the Government’s clampdown on nondoms. He said: “The Government went into nondoms without giving it any substantive thought at all. It was a kneejerk reaction to a Conservative initiative. The Government misunderstood the nature of what it was doing, and the breadth of the repercussions.”

He also said that there was a need for banks to be more transparent and for bonuses to be tightened to reflect better the overall performance of investment groups. He said that investors had “painful reasons” for wanting “a greater emphasis on bonus payments that only kick in over a sensible period of time and which take into account the performance of the whole group, as well as that of the individual”.

The ABI wrote to Alistair Darling, the Chancellor, to step up pressure over planned changes to capital gains tax (CGT) ahead of the Budget next Wednesday. In a strongly worded letter, Stephen Hadrill, the director-general of the ABI, said that changes to CGT and frequent changes to the savings regime had “damaged the Treasury’s credibility”.

Mr Darling’s controversial proposal to abolish tapered relief on CGT and introduce a flat rate of 18 per cent has provoked anger in the City and in business. Critics have complained bitterly about the unintended consequences of the measures and the lack of consultation by Mr Darling.

The ABI reiterated its call for a compromise agreement for investment bonds in the light of changes to CGT measures. From April, investors in unit trusts and open-ended investment companies will be liable to 18 per cent CGT, while profits on investment bonds will attract a 40 per cent tax rate. The ABI has proposed a compromise tax rate for bonds of 30 per cent.

In his letter to Mr Darling, Mr Hadrill wrote: “We have seen serious problems in the last few months. Concerns about the handling of Northern Rock, reaction to the credit crunch and the fallout from various measures contained in last October’s PreBudget Report have all put the position of the financial services sector and London’s preeminence as a financial centre at risk. So the Budget provides a timely opportunity for you to repair the Government’s own reputation.”

The Treasury said that it was “not unusual for letters from stakeholders making their views felt to be received before the Budget”.

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