Some of the world's biggest banks with operations in Britain want the UK government to allow the banking sector to remain subject to European Union laws for five years after Brexit.
According to a document seen by Reuters, the lenders instructed law firms Linklaters, Freshfields and Clifford Chance to draw up a document on their behalf, which has since been shared with the Treasury and represents the most detailed request submitted to the government since the 23 June referendum.
"The report has been received as a fairly serious piece of work. It focuses on the legal underpinning of a transitional arrangement," a source from a large international lender was quoted as saying. "It's a heavyweight legal piece of work."
The document warns the British and European economies could suffer a severe setback stemming from the loss of critical financial services if banks do not secure a transition phase that extends beyond the two-year period, which will begin once the UK triggers Article 50.
Britain will not trigger Article 50 of the EU constitution, which would effectively rubber stamp its intention to leave the bloc, until next year but the pressing concern for worldwide banks is to ensure they retain access to the European banking passport system.
This allows banks and other financial institutions authorised to operate in an EU country, or a state member of the European Economic Area (EEA), to conduct business across the union.
"Transitional arrangements are likely essential," the document says. "This is important in order to avoid potential damage to the 'real economy' that is reliant upon uninterrupted access to financial services."
Should the transitional period not be granted, the document warns, some banks could struggle to move some of their operations out of Britain or to set up new British subsidiaries.
The banks are also understood to have asked the government to allow the European Court of Justice to rule on decisions related to their businesses during the five-year period. Demands for transitional arrangements have received a mixed response from the government, with some Treasury officials allegdly open to back some of the proposals, while the Brexit minister David Davis and Prime Minister Theresa May are yet to commit publicly to supporting any deal.
The Treasury said last week that the Chancellor Philip Hammond is closely listening to the views of the financial sector, which accounts for 10% of the British economy.
On Wednesday (8 December), France's top stock market regulator suggested leading banks were in advanced stages of planning to shift some of their operations from London to Paris amid fears over Brexit.
Benoit de Juvigny, secretary general of Autorite des Marches Financiers (AMF), told the BBC that "large international banks" based in London have conducted due diligence to move operations to the French capital.
However, analysts do not expect banks to be flee the UK anytime soon.
"It's not arrogance, London is where it is," Panmure analyst David Buik told IBTimes UK. "Negotiations and trade-offs will be tough but not insurmountable. I accept the passport issue but where there's a will there's a way. Even [Bank of England Governor Mark] Carney said London cannot be replaced."
Michael Collins, economist at the Institute of Directors admitted there was a "real risk" that different EU cities will attempt to poach banks' operations from the UK, but stressed London has many things that would help offset this risk.
"London is home to one of the world's largest pools of highly skilled, internationally-sourced labour, a convenient timezone, world-class infrastructure, the world's business language, and some of the world's best universities," he said.