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EU warns Britain - Don't assume free trade deal for the City

By Alastair Macdonald

BRUSSELS (Reuters) - European Union leaders will warn Britain it cannot assume its big financial services industry will be included in any free trade deal after Brexit, diplomats said on Monday after fixing negotiating terms in a draft document.

Britain's Prime Minister Theresa May, who will open negotiations with the EU in June assuming she wins a snap election she called last week, singled out banking and other financial services among her priorities for a future trade deal with the bloc after Brexit.

But France and other member states pressed for changes to the draft at Monday's meeting to ram home their opening position that any deal to allow the City of London, Europe's leading financial centre, continued easy access to EU markets must bind Britain to continuing regulation and supervision by Brussels.

"The 27 will not necessarily consider financial services in a free trade agreement, as Theresa May has expected," one said after aides to the 27 EU leaders, who will meet to agree the terms on Saturday, endorsed a draft of the so-called guidelines.

The new draft of the guidelines for EU Brexit negotiator Michel Barnier will be reviewed by ministers on Thursday and is expected to be signed off swiftly at Saturday's EU27 summit.

"There is nothing controversial in this among the 27," a second diplomat, who took part in Monday's talks, said. "We found a way to say things so that everybody feels safe."

Several other participants said that, as under the previous draft, there would be no specific mention of financial services as an economic sector, but that the guidelines for Barnier would stress that any future relationship should not endanger the "financial stability" of the EU's economy.

"Any future agreement on financial services will be subject to EU supervision and regulation," one said.

BREXIT BILL

Barnier, a former French minister and former EU financial services commissioner, has previously warned that, due to the continuing size and importance to Europe of the London financial sector, any post-Brexit agreement must ensure it is tightly regulated to satisfy EU concerns.

France and Germany are both among countries keen to attract more financial firms to Paris and Frankfurt respectively once Brexit cuts London off from the EU. The likely election of former banker and economy minister Emmanuel Macron as French president next month is unlikely to change France's position on setting strict terms for British access to EU markets.

Among Monday's other amendments to the draft negotiating guidelines, diplomats said the text would spell out that the EU wants Britain to pay Brussels a share of financial commitments made from the bloc's seven-year budget until the end of 2020 - nearly two years after Brexit takes effect on March 30, 2019.

British ministers have voiced resistance to EU plans to ask for about 60 billion euros ($65 billion) on departure, some of it to be paid for years after Brexit. But the EU will argue that Britain signed on to the 2014-2020 seven-year budget as a member and should pay its share of commitments.

Until Britain agrees to such terms in its "divorce" settlement during the two-year negotiating window, EU leaders say they will not open talks on a future relationship.

Relieved by Macron's victory in Sunday's first round of presidential voting - and by polls giving him a huge lead over anti-EU National Front leader Marine Le Pen for the May 7 run-off - EU leaders want to deny Britain benefits from Brexit that could fuel demands by Le Pen and others to break up the bloc.

(Editing by Louise Ireland)