By Huw Jones
LONDON (Reuters) - A transition deal is needed "pretty damn quick" to avoid "skirmishes" with the European Union over whose banking and insurance rules should be followed after Brexit, the UK's top markets regulator said on Wednesday.
Banks and insurers are licensing new hubs in Frankfurt, Paris, Luxembourg and Dublin to maintain links with EU customers after Britain leaves the bloc in March 2019. Without a transition deal, regulators worry that such moves risk becoming disorderly given the tight timeframe.
"I think there does need to be a transition period and we do need to agree it very soon, frankly," Financial Conduct Authority Chief Executive Andrew Bailey told a parliamentary hearing.
British media reported on Wednesday that the UK government has offered to pay much of what the EU is demanding to settle a Brexit divorce bill in the hope of opening talks on a transition deal and future trading terms next month.
Bailey said "absolute clarity" was needed in a transition agreement on whether Britain carries on applying EU rules or not during that period.
"If the agreement is the UK doesn't, what I do think we need there is absolute clarity about what that means in terms of the rules of engagement with the EU," Bailey said.
"What would be a bad outcome there is constant skirmishing."
Transition needs to be legally binding, such as an unconditional commitment written into the conclusions of next month's EU summit, he said.
John McFarlane, chairman of Barclays told the same hearing the bank could move hundreds of staff out of Britain to EU centres such as Ireland and it was assuming a "semi worst" case plan.
"It's not impossible by end March 2019, we could do it if required, but a bit more time to implement would be valuable," McFarlane said.
Financial centres are offering London banks and insurers speedy licensing applications in the English language.
"For some countries, this is a cake-cutting exercise in terms of getting business," Bailey said.
Cutting off London and fragmenting Europe's capital market would backfire on the EU, he added.
"The big question for the EU financial market is which way do you want to go in future?"
Bailey said Britain should not become a "rule taker" or simply pasting EU rules into UK law in return for access to the bloc, like Switzerland or Norway.
He said a "mutual recognition" deal with the EU, or the pursuit of global rules would be better alternatives but the chances of either happening soon were not good, leaving Britain squashed between Europe and the United States.
The United States is currently "suspicious" of multilateral or global financial rules, while a "mutual recognition" deal with the EU is "frankly quite challenging to get".
"It's very important that we don't become isolationist at this point," Bailey said.
(Additional reporting by Anjuli Davies; Editing by Andrew Heavens)