The UK government has told the financial services industry that Britain will seek to develop a distinct regulatory framework from the EU after Brexit in an effort to secure a long term competitive advantage for banks, fund managers and insurers.
Senior representatives from the financial services industry, who met Brexit secretary David Davis last week, were also told that for a transition period immediately after leaving the EU the government would try to ensure that the sector saw benefits from a "standstill" deal with all existing cross-border agreements remaining in place.
However, Mr Davis believes that if Britain maintained the same regulatory framework for financial services as the EU in the long term — without having any influence over its composition — this would erode any competitive advantage the UK-based industry would gain from being outside the bloc.
Since Britain's EU referendum in June 2016, many in the City of London have argued that maintaining some form of regulatory equivalence with Brussels in future would be one way of retaining some of the UK's financial services activities that would otherwise be taken by other countries in the bloc.
According to three people with knowledge of last week's meeting between the government and business, Mr Davis has come into line with chancellor Philip Hammond in proposing a standstill period of two to three years after March 2019 during which the existing UK-EU relationship would be broadly maintained.
Those who attended the meeting included former European commissioner Jonathan Hill, RBS chairman Sir Howard Davies, Morgan Stanley head of Europe Rob Rooney, EY UK chairman Steve Varley, hedge fund manager Sir Paul Marshall, London Stock Exchange chief executive Xavier Rolet, and Legal & General Investment Management head of personal investing Helena Morrissey.
As well as Mr Davis, the meeting also involved business secretary Greg Clark and City minister Stephen Barclay.
The discussion about financial services regulation took place at one of four breakout sessions held on Friday last week at Chevening, foreign secretary Boris Johnson's country residence.
At this session, ministers gave the impression to the industry figures present that they were committed to a standstill transition period.
A standstill deal was essential, said one senior banker. "You need the status quo."
However, people at the Chevening meeting said Lord Hill argued that, although the UK should remain aligned to global financial regulation, it would be wrong for Britain to be irrevocably tied after the transition period to an EU legislative framework over which it had no control.
One Chevening attendee said Lord Hill — who has provided informal advice to Mr Davis — believed the representatives of the financial services industry at the meeting had endorsed this negotiating approach with the EU, and had fed this conclusion back to the Brexit secretary. "Hill believed he got the nod from the group," added the attendee.
But others familiar with the meeting said there was "quite a bit of pushback" from industry figures about Lord Hill's approach — notably the idea of the UK diverging from EU financial services regulation after the transition period.
Banks are conscious of global convergence on sector regulation and do not want to see the UK engage in a "race to the bottom" by abandoning equivalent standards, said one of these people.
For some sectors such as investment banking and wholesale insurance, the maintenance of a level playing field on regulation is particularly crucial because it underpins mutual access to markets and is easier to manage than multiple different regimes.
Carving out retail and commercial banks from the scope of EU rules might be less controversial, said one banker, but even for these institutions it is low down their list of priorities.
Before the June general election, prime minister Theresa May and Mr Hammond warned that if Britain could not secure a good future trade deal with the EU it had "another option" — walking away from a "bad deal" and competing with the bloc as a Singapore-style low-regulation, low-tax economy.
Since the election Mrs May has backed away from that threat. However, Mr Hammond said at a City event last week that Britain would not be bound in the future to accept EU regulation that sought to damage UK-based financial services.
"We will not accept protectionist agendas, disguised as arguments about financial stability," he said.