By Anjuli Davies and Andrew MacAskill
LONDON (Reuters) - The British government may find it tough to fight for the financial services industry in Brexit negotiations because of the still poor public image of bankers, John McFarlane, who chairs lobby group TheCityUK as well as Barclays <BARC.L>, said.
Bankers have struggled to shed a reputation as reckless and overpaid since the 2008 financial crisis, when taxpayers spent more than 60 billion pounds to bail out Royal Bank of Scotland <RBS.L> and Lloyds Banking Group <LLOY.L>.
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"The financial services industry has not covered itself in glory. I will use the words "potentially politically toxic" in some of its aspect," McFarlane told Reuters on Wednesday during an interview in his office at the Barclays headquarters in the capital's modern Canary Wharf financial district.
"The government is in a difficult position....Coming out wearing on your sleeves 'we've got to save the financial services industry', is not politically smart" he said.
Most bankers based in Britain wanted to stay in the EU in June's referendum, fearing an exit would shut them out from Europe's single market which enables them to sell financial services freely across the bloc.
Some large banks who use London to run their EU operations have said they could start moving staff as early as 2017 if there is no clarity on whether Britain will retain access to the single market, which could threaten London's future as a global financial center.
But despite the political sensitivities, McFarlane believes British Prime Minister Theresa May and her Brexit ministers are privately motivated to secure a favorable trade deal for the industry to protect a vital source of tax receipts.
"If you listen to purely the politics you jump to a very austere place," he said. "If you listen to the economics you jump to a better place."
While May said at the Conservative Party Conference last week that financial services was one of many strategic sectors, two financiers, who declined to be named, said it had been made clear to them by a government minister that their concerns over being able to sell into EU markets after Brexit were overblown.
Financial services generate 190 to 205 billion pounds of revenue each year for Britain and employ about 1.1 million people, an Oliver Wyman report said this month.
The industry, which pays about 60 to 67 billion pounds in taxes, could lose up to 38 billion pounds in revenue in a 'hard Brexit' that would leave it with restricted access to the EU single market of 500 million consumers, the report commissioned by TheCityUK said.
May has said she would trigger the two-year process to leave the EU by the end of March and last week appeared to prioritize capping immigration, one of the main motivations for the Brexit vote, over retaining access to the single market.
Once Britain has begun formal talks to withdraw, it will leave two years later even if no new trade deals have been agreed, unless every EU member state agrees to extend talks.
EU leaders have insisted they would only grant Britain full access in return for the continued free flow of EU citizens.
ECONOMY VERSUS POLITICS
McFarlane said that whilst the first priority of the British government would be to exit the EU sensibly, the second was to retain the UK and London as a global financial center.
Sterling has fallen 18 percent against the dollar since the referendum, with investors concerned Britain is heading for a "hard Brexit" in which Britain leaves the EU’s single market in order to impose controls on immigration, disrupting access to the country's main trading partner..
"How much money do you want to give away for a political principle. If it is enormous amounts of money that weakens the economy. It is the economy, stupid," he said.
The big questions for banks and fund firms now is whether they will be granted a transition period, and if, when and how they might need to reduce operations in Britain, said McFarlane.
Although the EU has maintained that it will not start any formal negotiations with Britain before Article 50 is triggered, McFarlane believes a mutually beneficial deal to support financial services could be struck sooner, behind closed doors.
"You can't afford a cliff edge...I can't see any scenario where there's no transitioning."
(Editing by Sinead Cruise and Alexander Smith)