LONDON, March 7 (Reuters) - Banks and insurers lined up to back the British government's demand that a future trade deal with the European Union must include financial services, putting them on a collision course with Brussels.
Faced with the world's biggest financial centre being cut off from a core market after Brexit, British finance minister Philip Hammond said on Wednesday that finance should be at the heart of a new trade deal with Europe.
He sketched out how Britain and the EU could keep their financial markets integrated and avoid costly fragmentation, based on a blueprint from the City of London financial district and TheCityUK lobby.
But just before Hammond spoke, Brussels offered a free trade agreement that falls well short of Hammond's plans, saying Britain's banks and insurers would get the same treatment as rivals from other non-EU countries and only get limited access.
Catherine McGuinness, policy chair for the City of London, home to Britain's financial district said the EU's position would hit the wider European economy.
"Refusing to include financial services as part of a final trade agreement would undoubtedly damage the whole European economy, limiting growth and risking jobs," she said.
"We urge the EU to give their negotiating team flexibility by including financial services as part of a final trade agreement."
The Association of British Insurers said it would defy common sense not to include financial services in a trade deal.
"It's now time for everyone to drop the dogma and get round the table," ABI Director General Huw Evans said.
The Investment Association said protecting the ability of asset managers in Britain to serve EU-based clients was critical to avoid disruption to Europe's economy and to protect the integrity of the wider financial services industry in the UK.
The financial sector has little option but to support the British government's position given that the alternative is a patchy system of EU market access known as equivalence.
"I haven't ruled out equivalence. What I've said is that the EU's model of equivalence, which is unilateral and withdrawable on no notice in some cases... would not work," Hammond said.
He expects Britain and the EU to agree a transition deal later this month to bridge a gap between Brexit Day on March 29 next year, and new trading relations from January 2021.
Banks have said transition would provide critical breathing space to adjust to Brexit and give more time for trade negotiations.
"Firms now want to see swift agreement on the transition period, to provide much-needed certainty and allow us to focus on reaching a mutually beneficial trade deal," said Stephen Jones, chief executive of UK Finance, a banking lobby.
But many banks like Goldman Sachs and Standard Chartered have decided not to rely on a transition deal or bet that Britain will get favourable trading terms for financial services once the political noise dies down.
Instead, they are pushing ahead with moving staff and operations from London to Paris, Frankfurt or Luxembourg to avoid rupturing links with EU customers.
"The clock is ticking. The end date is not that far away," Standard Chartered's Chief Financial Officer Andy Halford told Reuters.
"And if you want an assured, continuity of activity there does come a point where unfortunately you've got to get on with these things and just say, even if there was a change of mind on other fronts, it may arrive too late."
Additional reporting by Lawrence White and Emma Rumney, editing by Jane Merriman