Britain must secure a transitional Brexit deal or it could run the risk of seeing financial firms moving elsewhere, ministers warned on Thursday (15 December).
The House of Lords committee has urged the government and the European Union to reach a transitional agreement covering the time between Britain leaving the 28-country bloc and the start of permanent trading relations.
"Negotiations on financial services should commence as early as possible after notification under Article 50, and the government should pursue an early announcement on a transitional period," the report said.
"The more the new relationship departs from the status quo, the longer any further transitional period may need to be."
Prime Minister Theresa May, who will take part in EU-wide discussions on migration and the economy on Thursday, has said she will trigger Article 50 by the end of March, but the report urged her to avoid a "cliff edge" scenario for businesses.
The pressing concern for financial institutions 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.
According to the report, 5,476 banks, insurers and asset managers have passporting rights, which are worth a combined €40bn to €50bn in annual revenue to the UK financial industry, which accounts for 7% of the UK economy and employs over a million people.
Kishwer Falkner, the committee's chairman, said that if passporting rights are lost, mutual recognition of EU and UK rules in its current form might not be a suitable alternative.
"The government needs to determine as precisely as possible which firms currently rely on passporting and the degree to which equivalence provisions might provide a substitute," she said.
"Companies may decide that uncertainty is too high a price to pay so they might as well move to Dublin, they might as well move to Frankfurt – that is our great concern."
The report added that a number of firms do not themselves know the extent of their reliance on EU passports, and the committee urged them to cooperate with the government to provide a detailed picture of their degree of reliance.
Should passporting rights not be maintained, the government should seek a deal to bolster the equivalence regime to avoid sudden rule changes by Europe, the committee added.
"The committee got a sense that [government] engagement has been sporadic and it should be more consistent and there ought to be a clearer view," said Faulkner.