The UK government should seek an urgent transition deal to head off chaos in the financial services sector resulting from Brexit, according to a committee of peers in the House of Lords.

Baroness Kishwer Falkner – chair of the House of Lords’ EU Financial Affairs Sub-Committee, made of members of the UK’s upper house of parliament – wrote to chancellor Philip Hammond to issue a stark warning on the possible impact of the UK exiting the EU.

In a public letter to Hammond, Baroness Falkner wrote: “[F]or the financial services industry to be able to continue the orderly servicing of cross-border clients, a transition period needs to be agreed by the end of the year.

“The clock is relentlessly ticking. Witness after witness told us that the financial services industry won’t be able to continue servicing cross-border clients after 2019 if a transition period is not agreed by the end of this year.”

The chancellor has already conceded the need for a swift deal. In evidence to the Treasury Select Committee, he said a transitional arrangement was “a wasting asset”.

He explained that, although it was currently valuable, by next summer “its value to everybody will diminish significantly”.

Baroness Falkner’s intervention follows a hearing of the committee she chairs on 1 November, at which Sir Jon Cunliffe from the Bank of England warned financial institutions in London were preparing for the worst.

He said: “They are saying, ‘Until I know what happens, I will assume no European authorisations other than [World Trade Organisation rules], and no transition,’ and that is necessary for the management of stability risk as a whole.”

Sir Jon said financial institutions needed not only to have the time to make an orderly transition but also to have clear sight of the final destination.

“What is important for us is that firms know where they are going, where they have to go to, and they have the time to get there in an orderly way,” he said.

Although a transition deal would buy time, Sir Jon contonued, it would not address what he called the “only adjust once” criterion.

Meanwhile, Sam Woods, chief executive of the Bank of England’s Prudential Regulatory Authority, sounded the alarm over the status of trillions of pounds of derivatives and insurance contracts.

He told the Lords’ committee that the issue was not the rupture of the contracts themselves, rather that the exercise of rights and obligations under them were regulated activities that would become illegal in the event of no deal being reached.

‘No deal’ would mean it was illegal for insurers to pay out on some claims, he added.

Woods said: “If the UK exits the EU and you have a customer who, say, has bought a policy from a UK insurance company but is in the EU27 and wants to claim, it may well then be illegal for the company to pay that claim.”

The Lords’ committee also heard that a communique regarding any potential transition deal from the European Council might lack legal force. 

Witnesses have already told the committee they want a transition agreement to be legally binding – perhaps through a ‘memorandum of understanding’ deposited at the United Nations.

Sir Jon said: “I do not see any way that the European Council could make a legally binding commitment until it either has a treaty between the UK as a non‑EU member and the EU, or some other legal means.”