Brexit: France wants EU to regulate the City of London after UK leaves

Draft negotiating document also reportedly insists Britain grants permanent residence to EU citizens who arrive in the UK before formal separation

Securing the future of the UK's banking and financial services is seen as a key priority for a deal once the UK leaves the EU (Getty)

France has warned Britain that the City must continue to be overseen by European regulators after Brexit and financial services could be excluded from any trade deal.

Securing the future of the UK's banking and financial services is seen as a key priority for a deal once the UK leaves the EU. But France and other member states changed the negotiating terms in a draft document that was agreed on Monday, according to Reuters.

Negotiations will begin after the 8 June snap general election and will be guided by those terms, which are due to be discussed further on Thursday and expected to be finalised at Saturday’s EU 27 summit.

“Any future framework should safeguard financial stability in the union and respect its regulatory and supervisory standards regime and application,” the new negotiating clause says in a draft quoted by Reuters.

“The 27 will not necessarily consider financial services in a free trade agreement, as Theresa May has expected,” one official told the news agency.

The UK financial industry has recently looked towards the option of “regulatory equivalence”. Under this scenario, Britain’s financial firms could be overseen by local watchdogs and still sell their services across the union using a passport, as long as the rules here remain similar enough to the EU’s.

The latest negotiating document could cast the viability of that option into doubt. EU figures are understood to be reluctant to allow London to maintain its position as Europe’s dominant financial centre without close oversight from Brussels.

The document also reportedly insists Britain grants permanent residence to EU citizens who arrive in the UK before formal separation. Last month, MPs rejected a House of Lords amendment to the Government’s EU Notification of Withdrawal Bill that would have unilaterally guaranteed citizenship rights for three million EU citizens currently living in the UK.

More than 5,000 financial services firms could be at risk if the City loses the right to operate across the 27 remaining members of the EU – “passporting”.

A total of 5,476 UK-registered firms hold at least one passport to do business in another member state of the EU or the wider European Economic Area, according to December figures from the Financial Conduct Authority, quoted by Treasury Select Committee chair Andrew Tyrie. Around 8,000 firms registered in other EU or EEA member states hold passports to do business in the UK.

Finance firms have been drawing up contingency plans for Brexit in recent months, with many preparing to set up EU bases in cities such as Frankfurt, Paris or Dublin.