LONDON A deal to bridge the gap between Britain leaving the European Union and the introduction of its new trading terms with the bloc could shield financial firms from any abrupt changes and ultimately keep them based in the UK, a senior MP said, finding support from the finance ministry.
Banks in Britain have said their fingers are "hovering over the relocate button" because they still don't have a clear idea of what life after leaving the EU will look like.
Financial services is Britain's biggest economic sector, raising more than 60 billion pounds in total taxes annually and banks want arrangements to tide the sector over until new, permanent trading terms are agreed, which could take many years.
Prime Minister Theresa May has said she will begin formal divorce talks with the EU by the end of March.
"Many firms are understandably concerned that in April 2019, the government's current timetable for leaving the EU, they will be faced with a sudden change in their operating environment," Andrew Tyrie, chairman of parliament's Treasury Select Committee, said on Monday.
"Transitional arrangements could offer firms some protection."
Tyrie, who had backed remaining in the EU, said the committee was asking banks, regulators, trade bodies and experts questions such as whether transitional arrangements were needed and, if so, how should they be designed and negotiated.
"Without an early commitment to them, firms may conclude that they cannot afford to wait, and act pre-emptively to protect their shareholders' interests," Tyrie said.
"This action could include some cancellation of investment and/or relocation out of the UK, to the detriment of the British economy, and important parts of the financial services industry."
Separately, Chancellor of the Exchequer Philip Hammond backed the idea of a transition period to aid a smooth Brexit, saying he expected discussions on this would come early in the negotiations between Britain and the EU.
Britain should not unilaterally seek a transition period, however.
"I don't think we should approach this on the basis that we need transitional arrangements, because I think we can only get to a situation where we have a transition if there is a genuine meeting of minds on both sides of this negotiation that they are beneficial," Hammond told lawmakers on Monday.
"Collectively I think transitional arrangements would be beneficial to us."
A document drawn up by lawyers for banks said that large lenders in Britain want the UK government to allow their industry to remain subject to EU law for up to five years after Brexit.
Banks have said it is also in Europe's economic interests to have transitional arrangements, but hardline backers of Brexit fear such a deal would mean Britain not leaving the EU for many years in practice.
(Additional reporting by Camila Hodgson; editing by Alexander Smith and Susan Fenton)