The European Union has said it would not allow the City of London access to European markets if the UK does not continue to follow its rules closely post Brexit.
Valdis Dombrovskis, the EU's financial services chief, told the FT the UK would be granted access through the ‘equivalence' system that firms from countries like the US currently use.However, he added that should the UK decide not to be closely aligned with the EU's rules, including those on ensuring financial stability and protecting consumers, access could be cut off.
"The more systemically important the market is for the EU, the more we import potential risks and the closer regulatory alignment that is expected," he said.
The more systemically important the market is for the EU, the more we import potential risks and the closer regulatory alignment that is expected"
Britain will have to rely on temporary measures after Brussels rejected the possibility of a permanent access deal for financial services as part of the Brexit negotiations.
The EU has around 40 different equivalence provisions across its financial services laws. They cover areas such as allowing EU companies to use clearing houses and exchanges based outside the bloc, and allowing non-EU brokerages to offer trading services throughout the bloc.
The £41trn in derivatives contracts transacted through London on behalf of European insurance and pension giants means that a hard break would be near impossible without causing a massive disruption.
Equivalence is used by firms in the United States, Singapore and Japan but was not designed for a global financial hub on the EU's doorstep. Dombrovskis hinted that "it should be overly difficult" for Britain to qualify for equivalence after Brexit.
This is because "currently the UK is applying EU financial sector legislation", he added.
Boris Johnson and his allies have argued that the current alignment of the UK and the EU would mean a trade agreement would be much easier to agree than deals the bloc has struck with countries such as Canada.