Businesses, particularly within the financial services industry, have long pushed the government to go for a transitional arrangement.
A cross-party group of peers, last week, said Britain's financial sector must be offered a "Brexit bridge" to prevent companies moving to rival locations such as New York, Dublin, Frankfurt or Paris.
However, Linklaters, Freshfields and Cliffords, three of the UK’s largest law firms, said banks operating in Britain have a legitimate legal right to retaining passporting rights and continuing to operate across the EU after the UK leaves the bloc, in a new report published this week.
Banks could appeal to the European Court of Justice on the basis that they have a right to “legal certainty” of a stable regulatory environment, according to the document, citing the Vienna Convention on the Law of Treaties.
"EU law cites a number of different bases for requiring transitional arrangements," the document said.
“A failure to do so could possibly create an entitlement for an affected EU firm to take action against the commission.”
Finance companies are pressing Britain and the EU to agree to a transition deal that would keep many of the current arrangements for up to five years to help cushion them from the effects of Brexit.
There is no indication yet that banks are considering using the law to challenge the EU. Other lawyers say it would have limited chances of succeeding.
However, the fact that banks and lawyers are exploring these options shows the work they are doing to find work arounds, mainly to buy time before they decide if they will move some operations from Britain to the continent.
Lloyd’s of London has become one of the first major City businesses to confirm it will move a part of its operations to the continent in reaction to the UK’s vote to leave the EU.
Meanwhile, Japanese banks, including Nomura and Daiwa Capital Markets, have told the Government they will begin moving operations to the EU within six months unless the Government can provide clarity on the UK’s access to the single market.
Additional reporting by Reuters
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