UK's Hammond: sceptics are wrong to say banks can't be in Brexit deal

By William Schomberg and Andrew MacAskill

LONDON (Reuters) - British finance minister Philip Hammond will tell the European Union on Wednesday that it must drop its tough stance on the City of London and allow Britain's giant financial services sector to be part of a post-Brexit trade deal.

Brussels has so far refused to let Britain pick the parts of the EU's single market to which it can retain free access.

But Hammond will say the EU had sought to include financial services in other trade agreements in the past, and it made no sense to exclude them from the Brexit deal that London and Brussels are due to hammer out in the coming months.

London vies with New York as the world's financial capital, dominates global foreign exchange, hosts the largest commercial insurance market and more banks than any other centre, something Hammond said helped EU companies and consumers.

"It is time to address the sceptics who say a trade deal including financial services cannot be done because it has never been done before," he was due to say in a speech, excerpts of which were released to the media.

"To them I say every trade deal the EU has ever done has been unique. The EU has never negotiated the same arrangement twice," Hammond said, pointing to the bloc's trade deals with Turkey, Canada, Singapore, South Korea and Switzerland.

The chairman of the EU leaders group, Donald Tusk, will present draft guidelines on Wednesday on what the bloc wants in a trade agreement with Britain.

A stand-off between Britain and the EU over financial services -- which account for over a tenth of British economic output -- is shaping up to be one of the key Brexit battlegrounds before Britain leaves the bloc in March 2019.

Some analysts say the sector could be a big loser from Brexit but many banks have so far made only limited moves away from London. Top U.S. investment banks plan to hire far more people in London than anywhere else in Europe.

CHALLENGING, BUT POSSIBLE

In his speech on Wednesday, Hammond will say Brussels originally aimed to include financial services in a free trade deal with Canada which in the end failed to provide much new access for banks. The EU had also wanted to include the sector in now-stalled trade talks with the United States.

"At the time, people rightly argued that this was a challenging objective. But it need not be so in a partnership between the UK and the EU," he said. "Our markets are already deeply interconnected.

"So I am clear not only that it is possible to include financial services within a trade deal, but that it is very much in our mutual interest to do so."

The EU has said Britain cannot continue to have free access to the single market because it has ruled out continuing to meet its membership conditions -- chief among them the free movement of workers from other EU countries to Britain.

EU officials have also said services are not usually included in trade deals which tend to focus on lowering barriers to goods instead.

Prime Minister Theresa May said on Friday that financial services should be part of Britain's new relationship with the EU and London would promise to preserve similar regulatory standards, echoing a proposal made by Britain's finance industry.

The City of London's Lord Mayor backed that call on Wednesday, saying keeping British and EU rules in lock-step after Brexit was an ambitious but achievable goal.

However, the EU has already said such a plan is not acceptable. On Tuesday, France said there was little chance of securing a free trade deal for financial services that would provide the degree of access sought by the sector.

($1 = 0.7201 pounds)

(Writing by William Schomberg; Editing by Angus MacSwan and Catherine Evans)