Failure to agree terms for the free flow of financial services after Britain leaves the bloc in March 2019 could lead to “market fragmentation” and “harm to customers and businesses”, the Lords EU Financial Affairs sub-committee said.

In a report published today, the panel concludes Brexit presents “an opportunity” to change the regulations surrounding the UK's banking sector - which are currently imposed by Brussels.

But the study also warns the Government needs to “urgently clarify” what it hopes to achieve in terms of a future trading relationship.

Exactly how the UK’s finance sector will operate after Brexit has been a highly contentious issue, with EU Exit Secretary David Davis pushing for tariff-free access to the EU27 - an agreement he coined “Canada plus plus plus”.

However, negotiators in Brussels have dug in their heels and insisted Britain will not be allowed to “cherry pick” a Brexit trade deal.

Commenting on her committee’s report, chairman Baroness Falkner of Margravine said: "The UK's financial services sector is a global asset and both sides should want it to continue serving clients throughout Europe.

"There is a risk of market fragmentation and financial instability if the UK loses access to the EU, as well as harm to customers and businesses.

“Brexit is an opportunity to tailor the regulatory regime to strengthen the UK’s financial services sector, but the UK must remain committed to the international standards put in place following the financial crisis and continue to shape them to ensure a robust regulatory regime.”

The study, entitled ‘Brexit: the future of financial regulation and supervision’, also recommends the UK and EU urgently reach an agreement on terms for the proposed two-year transition.

Without a deal, the study says, companies will be forced to activate their "worst-case scenario" contingency plans which would have “stark implications" for financial stability.

But in order to be successful, the committee said the transition should allow a "standstill" period to enable the two sides to settle their new relationship.

This would then be followed by a "seamless" start to trading under the new terms.

The committee’s report comes just a day after new research by a non-partisan think-tank revealed the UK’s banking sector is one of the least vulnerable to Brexit.

Professor Raquel Ortega-Argilés, and colleagues from ‘The UK in a Changing Europe’, concluded that despite being such a large part of the British economy, the loss of EU market access would have an “almost entirely negligible” effect on the finance sector.