BRUSSELS (Reuters) - The EU on Wednesday offered Britain a free trade deal for their post-Brexit ties that fell well short of ambitions set out by Prime Minister Theresa May last week, notably for the country’s dominant financial sector.

In a draft seen by Reuters, the remaining 27 European Union members said they wanted a close partnership with Britain, but its depth would be limited by Britain’s own wish to leave the bloc’s single market and the customs union.

“Because of Brexit, we will be drifting apart,” the chairman of EU leaders Donald Tusk told a news conference, delivering a message that contrasted sharply with May’s call for future trade to be as “frictionless as possible”.

Referring to what he called the first free trade deal ever to loosen economic ties, he said it would make bilateral trade “more complicated and costly than today, for all of us.”

Tusk said that, while he understood May’s goal to make Brexit a success for Britain, that was not the EU’s objective.

Crucially, the bloc said Britain would be treated like any other third country when it came to financial services - which London had pressed to be included in the future deal.

Financial services generate more than 10 percent of Britain’s economic output and are the only area in which it has a trade surplus with the EU, making London very keen to preserve its banks’ current access to continental Europe.

But the text said in the future, Britain’s financial firms would only be allowed to operate in the EU “under host state rules”, reflecting “the fact that the UK will become a third country and the Union and the UK will no longer share a common regulatory, supervisory, enforcement and judiciary framework.”

In a sign some large banks may be losing patience with the protracted uncertainty about the future, Goldman Sachs GS.N has put more than a dozen UK-based banking, sales and trading staff on notice to move to Frankfurt within weeks.

That is one of the first tangible signs that banks are starting to act on Brexit contingency plans to keep what the EU calls passporting rights - the possibility to offer services to all EU clients via just one local licence.

LIMITED ACCESS

British finance minister Philip Hammond called the EU guidelines a very tough position that any skilled negotiator would start with.

While the EU says it does not want to mete out punishment Britain, the trade deal offer will come as another blow to Britain. The bloc has also recently outlined its contingency plans for avoiding an Irish border after Brexit, which Britain said would undermine its constitutional sovereignty.

With no passporting rights for its banks, the best option London can hope for is regulatory equivalence, under which they can get more access to the EU market if British financial rules, though not identical to EU ones, are seen by the bloc as achieving the same goals.

But Hammond said the EU’s third country equivalence regime would be wholly inadequate, and criticised the only patchy access it gives, as well as the possibility of revoking it at short notice.

He said a better solution would be mutual recognition and reciprocal equivalence, with sensible notice periods.

He also argued that Britain and the EU could reach a much better agreement on financial services than the EU had reached with Canada. Canadian financial firms must set up a presence inside the bloc and comply with its regulations if they want to do business there.

FILE PHOTO: A demonstrator carries a Union Jack and a European Union flag as the EU's chief Brexit negotiator Michel Barnier visits Downing Street in London, Britain February 5, 2018. REUTERS/Hannah Mckay/File Photo

The draft EU guidelines, which will be worked on by diplomats to be approved by the bloc’s 27 national leaders in late March, say services will be part of the deal, but spell out clear limits of what can be on offer.

“Such an agreement cannot offer the same benefits as Membership and cannot amount to participation in the Single Market or parts thereof,” the text read.

Tusk did say services would be covered in the future arrangement with London but stressed: “No member state is free to pick only those sectors of the single market it likes ...By the same token, a pick-and-mix approach for a non-member state is out of the question.”

Last December, the Bank of England proposed allowing EU banks in Britain to continue as branches in London after Brexit – on condition of reciprocity from Brussels – to avoid lenders having to find extra capital to become full subsidiaries.

Instead, the EU proposal sticks with the bloc’s traditional approach to dealing with banks from third countries.

“This means double regulation. You operate in London under UK rules and some elements would be under their rules for cross-border services,” Barney Reynolds, a partner at law firm Shearman & Sterling said.