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LONDON, Feb 12 (Reuters) - Britain and the European Union must find a way to settle future differences over how Britain's huge finance industry can do business in the bloc without resorting to a "metaphorical punch-up," the next governor of the Bank of England said.
Andrew Bailey said it would be surprising if Britain's financial sector was not deemed to be "equivalent" by the EU and able to do business in the bloc from the start of next year, when the current post-Brexit transition period ends.
The bigger challenge would be how both sides deal with the inevitable divergence in the rules they set for their industries, he said.
"You would want to have a mechanism to say OK, let's sit down and talk about what we're doing here," Bailey -- currently head of the Financial Conduct Authority regulator, who is due to replace Mark Carney as BoE governor on March 16 -- told lawmakers in the upper house of Britain's parliament.
"If that ended up in a sort of metaphorical punch-up every time and a threat to withdraw equivalence, that process would just not work properly."
Bailey also said there was a risk that Britain's finance industry is subject to higher standards than rivals from elsewhere because Britain was "big and near" to the EU
Financial services represent Britain's biggest export industry and the EU is the sector's biggest export market, worth about 26 billion pounds ($33.75 billion) annually.
British finance minister Sajid Javid has said he wants a durable relationship over financial services that would last for decades to come, but that Britain should be free to set its own rules for the sector.
Bankers are worried that their access to the EU will depend on a broader trade-off such as Britain allowing fishing in its waters, a concession the government is under pressure from Brexit supporters not to make.
EU chief negotiator Michel Barnier said on Tuesday that London should be "under no illusion" on financial services.
Sam Woods, a BoE deputy governor who also spoke in parliament on Wednesday, said the risk that the EU's recognition of equivalence could be withdrawn at 30 days' notice would deter cross-border activity.
"The firms are going to be quite reluctant to put much weight on it so I do hope that it will be possible to agree something more durable," he said. "But whether that will be the case in the negotiations, hard to say."
There was a risk that the EU was tempted to take a "mercantilist" approach to disputes over finance rules as way to grab business from London, Woods said.
A first test will be whether Britain gets permission from the EU for its clearing houses to continue processing trillions of pounds of derivatives for customers in the bloc.
The London Stock Exchange's LCH unit holds positions worth 57 trillion pounds ($74 trillion) on behalf of clients in the EU and needs permission to continue clearing for them after December.
"Im cautiously optimistic that our colleagues in the EU will deal with that one," Woods said.
Without permission by September, LCH will have to serve notice on its customers that they should shift their positions to a clearing house recognized by the EU.
($1 = 0.7703 pounds) (Reporting by Huw Jones and David Milliken Writing by William Schomberg Editing by Catherine Evans)