By Huw Jones, Anjuli Davies and Andrew MacAskill
LONDON (Reuters) - Britain must negotiate a staggered departure from the European Union over several years or risk banks leaving the country, the biggest banking lobby group will warn the government in coming weeks, according to sources familiar with the matter.
The British Bankers' Association will argue its case in a report to Prime Minister Theresa May's government, outlining the risks for the country if she does not secure a "transition" phase beyond the two-year withdrawal period that will begin when she invokes Article 50 of the EU's Lisbon Treaty.
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The document also calls for a clear message from the government about its vision of Brexit, following perceived mixed messages from ministers about the importance they place on retaining access to the EU single market.
"We're saying weneed an adaptation period ... to stop banks moving en masse," said one person familiar with the report, speaking on condition of anonymity as the proposals have not been made public.
The BBA's draft report is the first blueprint about how a transition could work - and spelling out the risks if it is absent.
The BBA declined to comment.
May has said she will invoke Article 50 by the end of March 2017, starting formal withdrawal negotiations with Brussels, meaning Britain would leave in early 2019.
Banks and business have long warned of the need to avoid a "cliff edge" or abrupt British exit from the bloc without advance knowledge about how trading terms might look.
If no deal has been agreed for Britain to retain some access to the single market after the two years of talks, UK-based banks may be forced to withdraw services to EU customers and vice versa unless they relocate to the continent.
Under the currently envisaged timetable, the BBA will warn, banks will not have enough time to prepare themselves for Brexit and their possible departure from London.
It would take banks more than two years to relocate operations. If no transition phase is allowed, they may be forced to leave the country before Brexit.
In the document the industry argues that Britain must secure an agreement with Brussels, around the time of triggering Article 50, for a period of delay following the two-year exit process. This would include a "bridging" period, as well as an "adaptation" period.
"We have two problems to solve. The bridge gets you to the new deal. You need an adaptation period as well. So the two things together become a transition period," said another person familiar with the document.
The document does not say exactly how long the transition period would need to be.
Britain's prime minister will have to have the backing of EU countries in order to secure such an arrangement.
There's a lot at stake.
Financial services account for about a tenth of British economic output. The sector generates more than 60 billion pounds ($80 billion) a year in tax, with 15 billion of that from foreign banks in London. UK-based banks also lend more than 1.1 trillion pounds to European companies and governments.
May pledged in November to address concerns that Britain could fall off a "cliff edge" - a sudden exit from the EU - in 2019, hinting at a transitional agreement.
She may face opposition to such arrangements, however, from those who support a clean and quick split from the EU.
The government is now formulating its position, balancing demands for immigration curbs against the need for access to the single market, but a lack of clarity has led some bank executives to fear the worst.
Those concerns are spelt out in the report.
So far, May has said she will give no "running commentary" on how a future deal will look, apart from saying she wants curbs on free movement of people into Britain from other EU states but also the best possible access to the European market.
Brexit minister David Davis said on Thursday that Britain would consider making payments to the European Union after it leaves to get access for businesses to the bloc's markets. His comments came a day after Bank of England Governor Mark Carney said British businesses needed more clarity on Brexit.
The government is appealing a court ruling that it needs parliament's approval to trigger Article 50.
(Editing by John O'Donnell and Pravin Char)