LONDON (Reuters) - British and European Union banks need a new system to let them do business with each other after Brexit to avoid splitting markets, Britain’s finance minister Philip Hammond said on Tuesday.

Britain's Chancellor of the Exchequer, Philip Hammond, delivers a speech to the Bankers and Merchants at The Mansion House in London, Britain June 20, 2017. REUTERS/Stefan Wermuth

Britain, the EU’s biggest financial market, is leaving the bloc in 2019, raising the prospect of an abrupt cut in cross-border links without a new trade deal. Rival financial centers, including Frankfurt, Paris and Luxembourg, are vying to benefit.

Hammond said Britain’s Brexit negotiations with the EU would take a “pragmatic approach” to financial services and how they are supervised.

“Fragmentation of financial services would result in poorer quality, higher priced products for everyone concerned,” Hammond told a financial audience in London.

At present, banks and insurers in London serve the EU market from a single base, but this “passporting” is set to end after Brexit without new arrangements.

“First, we will need a new process for establishing regulatory requirements for cross-border business between the UK and EU. It must be evidence-based, symmetrical and transparent. And it must reflect international standards,” Hammond said.

“Second, cooperation arrangements must be reciprocal, reliable, and prioritize financial stability. Crucially they must enable timely and coordinated risk management on both sides.”

“Third, these arrangements must be permanent and reliable for the businesses regulated under these regimes,” Hammond said.

Without passporting, banks, insurers and asset managers in Britain would only be allowed to access the bloc’s single market if they set up costly subsidiaries in the EU, which some are planning, or by using the EU’s “equivalence” regime.

Brussels allows market access to foreign firms whose home rules are “equivalent” to those in the bloc, but this can be withdrawn at short notice.

Last week the bloc proposed toughening “equivalence” for foreign central counterparties (CCPs) or clearing houses used by EU customers, seen by London’s financial sector as a land grab.

Under the proposals, a foreign CCP that clears large amounts of euro-denominated business must be directly supervised by EU regulators and, if necessary, the business moved to the bloc to safeguard financial stability.

GENUINE CONCERNS

Hammond said “protectionist agendas” were being advanced, disguised as arguments about financial stability and supervisory oversight.

But in a broad hint that Britain would accept some loss of regulatory sovereignty after Brexit to avoid loss of market share, he said the bloc has “genuine and reasonable” concerns about financial markets outside its jurisdiction.

“We saw such a concern articulated in the EU’s proposal on supervision of CCPs last week. We must, and we will, engage with all genuine concerns,” Hammond said.

London-based LCH LSE.L dominates euro clearing, and Bank of England Governor Mark Carney, who spoke alongside Hammond, said fragmentation of the business was in nobody's interest and could actually damage financial stability.

“Any development which prevented EU27 firms from continuing to clear trades in the UK would split liquidity between a less liquid onshore market for EU firms and a more liquid offshore market for everyone else,” Carney said.

Authorities should instead build on current models to develop “a new form of regulatory and supervisory cooperation”.

“The European Commission’s proposals announced last week recognize the importance of effective cooperation arrangements between the relevant EU authorities and their overseas counterparts,” Carney said.

“The Bank welcomes this.”