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LONDON (Reuters) - Britain's financial sector has thrived in the European Union and quitting the 28-country bloc could limit access to a huge market and trigger an "investment pause" due to inevitable disruptions, senior bankers told lawmakers on Wednesday.
Britain is expected to hold a referendum on EU membership later this year.
Prime Minister David Cameron wants to keep Britain in the bloc if he can persuade other EU leaders to agree to his demands for reform before the vote, though he has cautioned he could campaign to leave if he doesn't get a deal.
Eurosceptic lawmakers have criticised Brussels for piling new rules on banks in Britain at the risk of making the sector less competitive globally.
Officials from two UK banks, HSBC (HSBA.L) and Barclays (BARC.L), said access to the EU's single market and its common rules was "crucial" and a key factor in London's success as Europe's biggest financial centre.
"Harmonisation does make it easier for us," James Chew, HSBC's head of regulatory policy, told parliament's Treasury Select Committee.
London's financial strength outside the EU would hinge on whether there was a "soft" or "hard" exit, meaning how accommodative terms of business would be with Europe, Chew said.
"We know that under any circumstances it's going to be a very big disruption," Chew said. "There will undoubtedly be some sort of investment pause."
HSBC could be forced to "realign" some operations on the continent if access to the single market was restricted following a British exit, Chew said.
It would take time for the economic consequences of a "Brexit" vote to sink in, such as whether China would focus on developing relations with the EU, rather than with Britain, he added.
Mark Astaire, vice chair of Barclays' investment banking unit, said that while London had thrived within the EU and the single market was crucial, the capital would remain Europe's biggest financial centre in 10 years' time even if Britain left the bloc.
But Barclays' business customers say it makes sense to stay in the EU from an economic point of view, and an exit would be an expensive exercise for the bank and risks Britain being sidelined when it comes to shaping financial rules, he added.
HSBC and Barclays have begun Brexit contingency planning but Astaire and Chew were unable to give a figure for the costs of exit. The government should set out the terms of any exit ahead of the vote to help banks prepare, they said.
Some lawmakers argued Britain could create a more competitive financial services sector by setting its own financial rules outside the EU. HSBC is reviewing whether to keep its head office in London or move to Asia or elsewhere, partly to escape heavy regulation.
Chew said most EU rules were based on globally-agreed principles, and Britain had introduced tougher versions in some cases.
The EU has imposed conditions on non-EU countries that want to do business in the single market, such as having equally strict regulation of their own.
Astaire said the ability of a Britain outside the EU to make radical changes to its financial rules would be quite limited.
"It would not be easy to go very far," agreed Chew.
Editing by Mark Potter