Britain wants to put its financial sector at the heart of trade talks as it looks to protect the City of London – a key source of revenue for the Government.
The EU commission predicts a smaller UK financial sector would create stability across Europe and allow for the development of markets within the bloc.
Brussels is fearful that in a financial emergency Britain could prioritise companies UK operations over the firms’ activities in the rest of the EU.
EU chiefs believe doing so could result in the withdrawal of capital and vital services from within the union.
A senior diplomat told the Financial Times that the commission wanted to make sure it did not lose “influence” over the UK financial sector, which could “have such a huge impact on the EU”.
Another EU diplomat said: “There was a strong commission message that there would be no special deal.
“The UK is being told from the beginning what the situation is.”
EU chief negotiator Michel Barnier has ruled out any prospect of financial serves access as part of a free trade deal.
He said: “There is not a single trade agreement that is open to financial services. It doesn’t exist.”
Chancellor Philip Hammond warned the EU that they should not underestimate London’s role as a global leader in the financial services sector.
Speaking at a panel at the World Economic Forum in Davos, he said: “The idea that you can re-create in Frankfurt, or Paris, or Madrid, or Amsterdam or Luxembourg, or Dublin, London’s global financial centre I honestly think is a fantasy that isn’t going to happen.
“The winner will be New York or Singapore if London is damaged by this process and the loser will be, not only the UK , but the European Union.”
Brexit negotiations are to resume in March and, while no country directly opposes the Commission stance towards the UK financial sector, there are some differences among EU members toward the policy.
France is leading the call for a tough stance on Britain as they aim to encourage companies to relocate to Paris.
Other countries including Germany, Sweden and Luxembourg support the benefits of continuing cooperation as they worry a weak UK financial sector could damage the economy and have knock on effects across Europe.
The UK is currently home to the world’s largest number of banks and hosts the largest commercial insurance market.
About €6trillion of Europe’s financial assets are managed in the City of London, almost twice the amount of its nearest rival, Paris.