Britain will not get an 'ambitious' trade deal unless it obeys EU rules, Michel Barnier warned today - as he ruled out City firms being able to trade freely in the bloc after Brexit.

In an uncompromising speech, the EU's chief negotiator demanded the UK accept Brussels regulations on tax levels, food quality, and 'social' standards or face being excluded from key markets.

But he made clear that even if Britain signs up to those rules there is no chance of City firms keeping 'passporting' rights that mean they can operate unhindered across borders.

Mr Barnier also warned that Britain still needed to come forward with proposals to resolve the issues of the divorce bill and the Irish border before trade talks can start.

In an uncompromising speech today, Michel Barnier dismissed the idea that City firms will keep 'passporting' rights allowing them to trade in the bloc

Theresa May (pictured on a visit in Birmingham today with Chancellor Philip Hammond) will gather her Brexit 'war Cabinet' later to discuss an improved offer on the divorce bill

Mrs May appeared in good spirits today as she visited an engineering training facility with Mr Hammond this morning

The tough talk will come as a blow to the City, where firms have been hoping for a deal with Brussels that could allow them to keep operating in the same way.

So-called 'passporting' rights mean businesses can operate freely across borders without having to seek further regulatory approval.

Mr Barnier ruling out the prospect could fuel fears that more of them will choose to relocate at least some of their activities to other European countries.

Delivering a speech to the Centre for European Reform in Brussels, the French former minister said the EU wanted to forge an 'ambitious' trade relationship with the UK.

But he said Britain could not keep the benefits of the EU single market, and the bloc would 'never compromise' on financial regulations.

ISSUES HOLDING UP BREXIT TRADE TALKS Divorce Bill: Theresa May has said Britain will pay 20 billion euros for a two-year transition deal and honour the commitments we have made. But the EU are demanding Britain goes further in spelling out exactly what we will pay - squeezing out more cash before we move on to trade talks. Irish border: Both sides want to keep a soft Irish border, fearing a return to border guards and check points could reignite the violence of The Troubles. But it is unclear how this will be achieved when the UK leaves the customs union. The EU says Northern Ireland should stay in the EU customs union to avoid a hard border with the Republic. But the Government and the DUP - who are propping Mrs May up in No10 - say they will not accept a deal which involves a border between Northern Ireland and the rest of the UK. Citizens Rights Theresa May has laid out an offer to guarantee the rights of the 3.2million EU citizens in the UK. They will be given a two-year grace period to apply for settled status, which they will be granted as long as they pass criminal and security checks. But this was rejected by the EU Parliament who say the status should be automatic and not involve criminal records checks. Advertisement

'The legal consequence of Brexit is that the UK financial services providers lose their EU passport,' Mr Barnier said - although he suggested they might be able to keep more limited rights on the basis of 'equivalent' regulations.

With Theresa May gathering her Brexit 'war Cabinet' to discuss a fresh offer on the UK's Brexit divorce bill, Mr Barnier said that it remained his priority to 'settle the accounts accurately'.

He said it was for the UK to 'come forward with proposals' for how to avoid a hard border between Northern Ireland and the Republic.

He raised the possibility that Northern Ireland could stay in the customs union while the UK leaves - a possibility that has been flatly dismissed by the government.

'I expect the UK, as co-guarantor of the Good Friday Agreement, to come forward with proposals,' he said.

'The island of Ireland is now faced with many challenges. Those who wanted Brexit must offer solutions.'

Mr Barnier said 'Brexit means Brexit' as he repeated that the UK would not be allowed to 'cherry pick' the best bits of EU membership.

He cautioned that the European parliament would not approve a deal that permitted too much 'divergence' from EU regulations - a key demand of Brexiteers.

The UK faced an 'important decision' that would 'shape the discussion on our future relationship and shape also the conditions for ratification of that partnership in many national parliaments and in the European Parliament'.

'There will be no ambitious partnership without common ground on fair competition. Stated: Tax-dumping, food safety, social and environmental standards,' he warned.

He also rejected suggestions the UK will continue to be able to benefit from the work of European agencies, arguing that 'freedom implies responsibility for building new UK administrative capacity'.

But despite the hard line, Mr Barnier did make clear he was ready to discuss an 'ambitious' agreement.

'If we manage to negotiate an orderly withdrawal and establish a level playing field... the EU will be ready to offer its most ambitious FTA (free trade agreement) approach,' he said.

Foreign Secretary Boris Johnson, pictured in Downing Street today, is believed to be ready to sign off a higher divorce bill but only in return for commitments on trade

Leading Brexiteer and Trade Secretary Liam Fox (left) was seen going into No10 today. The stance set out by Mr Barnier (right) will give ministers pause for thought as they prepare for the start of trade talks

'This is why we have started internal preparations with member states, to be ready to talk about the future as soon as we will have agreed on how to settle the past.

Mr Barnier said Brussels would be ready for a 'no deal' outcome, but it was 'not our scenario'.

'I regret that this no-deal option comes up so often in the UK public debate,' he said. 'Only those who ignore, or want to ignore, the current benefits of European Union membership can say that no deal would be a positive result.'