By Huw Jones

LONDON (Reuters) - Britain needs to focus its efforts on the banking sector when negotiating new financial trading terms with the European Union as the benefits of unfettered access across the industry as a whole have been overplayed, think tank Open Europe said in a report on Monday.

Open Europe, which campaigned for reforming the EU and adopted a neutral stance in the UK's EU referendum in June, said a broad strategy across the whole financial sector would lack credibility.

"To claim that the success of the UK as a global financial center is entirely reliant on the passport is exaggerated," said Vincenzo Scarpetta, a senior policy analyst at the pan-European think tank.

Britain should focus on retaining or replicating passporting in the few financial sectors where loss of full access would hit hardest, Open Europe said.

Passporting is the ability under EU rules for any financial firm to serve the whole region from a single base, cutting costs and red tape.

British Prime Minister Theresa May has said that formal divorce talks with Brussels will start by the end of March and last two years.

Transitional arrangements would be needed to pave the way to new trading terms to avoid a "cliff-edge", Open Europe said.

Britain must try to convince the EU that keeping open financial markets across the Channel is a matter of mutual interest, with Deutsche Bank, for instance, getting nearly a fifth of its revenue in the UK.

"It is not obvious that business moving out of the UK would relocate to another European hub: New York, Singapore or Hong Kong would be just as well, if not better, placed to reap the benefits – meaning Europe as a whole could end up worse off," Scarpetta said.

Open Europe said a fifth of the banking sector's revenue, or up to 27 billion pounds, is tied to the passport, making it a top priority, while only 7 percent of assets in funds managed in Britain would be under direct threat from the loss of passporting.

There was no real single market for insurance in any case, and up to 87 percent of insurers who operate across borders already do so via subsidiaries, rather than branches that rely on passports, it said.

The Lloyd's of London insurance market, however, was an exception as current EU rules allow its pool of underwriters to write business across Europe.

Continental business only accounts for 11 percent of Lloyd's gross written premium, with possibly as little as 800 million pounds directly reliant on a passport, Open Europe said.

Apart from seeking a full passport in banking, Britain should ensure that EU-domiciled funds can still be managed from the UK after Brexit, and make it possible for insurers to do business with the continent.

"A bespoke agreement will be important for Lloyd's of London," Open Europe said.

Other ways to safeguard London as a top banking center would be to scrap the levy on bank's balance sheets and surcharge on their profits, or drastically reducing both if this was not politically possible, Open Europe said.

(Reporting by Huw Jones; Editing by Elaine Hardcastle)