By Huw Jones and Andrew MacAskill
LONDON (Reuters) - British-based banks would be foolhardy to expect to retain access to European Union markets in return for sticking closely to the bloc's rules after Brexit, a senior banking official said on Wednesday.
Banks in Britain can currently trade across the bloc's single market under European "passporting" rules, but this is expected to end after the UK pulls out of the EU in 2019.
Lawyers have said that entry to EU markets could continue under "equivalence", a system whereby Brussels grants access to non-EU firms that comply with rules similar to those in the bloc. This argument is now being challenged as Britain prepares to trigger formal EU divorce talks next week.
"I am quite alarmed that so much emphasis is being put on this because equivalence is a very specific concept," said Alan Houmann, head of European government affairs at Citi bank, and a senior member of TheCityUK, Britain's main Brexit lobby group for financial services.
Law firm Hogan Lovells had found that access based on "equivalence" is only available for a quarter of all financial services legislation, he said.
"So it is not something 'an investable proposition.' You wouldn't make an investment off the back of an equivalence provision in the directive," Houmann told a banking conference.
"Secondly, they can be revoked at very short notice, 30 days' notice....So equivalence is not the answer."
Citi <C.N> already has a base in another EU country, Ireland, but other banks must decide how they will continue serving customers inside an EU of 27 countries.
Goldman Sachs <GS.N> said this week it will begin moving hundreds of people out of London before Britain strikes a Brexit deal.
A draft report from law firm Freshields for the TheCityUK - seen by Reuters this month - floated the idea of "mutual recognition", which is now being looked at more closely by financial sector lobbyists, a person familiar with this thinking said.
Mutual recognition refers to a broad acceptance by two countries of each other's regulation, avoiding the rule-by-rule approach of equivalence which can get bogged down for years.
Barney Reynolds, a financial services lawyer with Shearman & Sterling, said the scope for using equivalence will be widenend considerably from January 2018 when revised EU securities rules come into force.
These rules, known as MiFID II, brings the possibility of equivalence "for the entirety, pretty much" of the investment business, Reynolds told the conference.
"The level of doomster stuff on equivalence I think is way overdone. It is not to say it's perfect," Reynolds said.
Equivalence was a good "building block" to being post-Brexit EU market access.
"If we can elevate ourselves above it to some mutual recognition framework that would be fabulous," Reynolds added.
(Reporting by Huw Jones; Editing by Keith Weir)