LONDON - A transitional period is crucial to avert Britain's financial services sector falling over a cliff-edge as a result of the country's exit from the European Union, a report from the House of Lords at Westminster said Thursday.

London is the world's leading financial services center, closely followed by New York, with other European cities far behind, said the report from the House of Lords' EU Financial Affairs Sub-Committee

"Any attempt to unpick London's highly developed financial services ecosystem could result in much of the business lost by the UK relocating to New York or other financial centers outside the EU, rather than the EU," the report warned.

The report has highlighted the importance of agreeing on a transitional period for financial services, so that a "cliff edge" is avoided, both at the moment of withdrawal following the Article 50 withdrawal process and as Britain moves to a new relationship with the EU.

The findings showed that third-country equivalence provisions in EU legislation are not a substitute for the passporting arrangements, which Britain-based firms can currently use, as they are patchy and vulnerable to political influence.

A priority for the government in the negotiations should be to seek to bolster those provisions, should passporting not be an option, said the report.

The committee also concluded that the wider EU economy relies on the financial services currently provided in Britain, which may not be easily replicated elsewhere in the EU. Therefore it would be in the EU's interests to preserve access to its market for UK-based firms, the politicians said in their report.

Baroness Falkner of Margravine, who chairs the committee, said: "The government has a lot of work to do. First of all, it must, early in the negotiation process, agree a transitional period so as to prevent UK-based financial services firms from restructuring or relocating on the basis of a 'worst-case' scenario."

"Last week, France's leading financial regulator said (in a media interview) that some major banks are in the advanced stages of planning to shift some operations from London to Paris."

"Second, it should go into negotiations with the strongest possible evidence base. It needs to determine as precisely as possible which firms currently rely on passporting and the degree to which equivalence provisions might provide a substitute. We found those provisions to be patchy, unreliable and vulnerable to political influence: the government should seek to bolster them wherever possible."

"The EU should also carefully consider the findings of this report. EU firms rely on the services provided in the UK, and pain caused to the UK's financial sector will not be the EU's gain, but New York's. We are in danger of a lose-lose scenario if pragmatism does not prevail," said the lawmaker.

In other findings, the committee warned there is a chance that Britain will lose the ability to clear euro-denominated transactions following Brexit. But it is unlikely that relocation of the business to the Eurozone would provide the benefits to the wider EU economy currently provided by clearing in Britain.

New York could provide such benefits, but if the business moved there, the EU would not benefit from repatriating the business.

The financial sector in Britain employs 1.1 million people, including 60,000 who are EU nationals and 100,000 non-EU nationals.

"The ability to access highly-qualified staff and easily transfer them between the UK and the EU is a key issue for the financial services industry. This is even more important for the FinTech sector, which relies heavily on talent, including entrepreneurial talent, from overseas," concluded the report.