LONDON - Financial businesses have realistic expectations about serving European Union customers after Britain leaves the bloc next year and could deal with a so-called hard Brexit, a top EU official said on Thursday.

The EU was not being threatening towards Britain by preparing for a possible "cliff edge" Brexit, European Commission Vice President Jyrki Katainen told reporters in Brussels.

"It would be completely irresponsible to create an atmosphere where we can say, don't worry, everything will go well and smoothly because we simply don't know," Katainen said.

The EU has told the financial sector to prepare for a smooth or hard Brexit, even if the bloc's aim is to obtain a good trade agreement with Britain, he added.

"The feedback from the financial sector itself is that they are prepared, they are realistic not to take too much risk as their duty is to serve their clients," Katainen said.

Many banks and insurance companies in Britain are applying for licences to open or expand hubs in the EU to avoid rupturing links with customers.

"After Brexit there is a big discontinuity in all the trade and services, but we still have a large market and it's supposed to be an interesting opportunity for all the financial institutions," Katainen said.

"Also in the future, I suppose we try to keep interconnections between EU and UK-based financial sector," Katainen said.

European Commission Vice President Valdis Dombrovskis told the same news conference he has not seen any financial instability due to Brexit, and an orderly departure remains the baseline scenario.

On Wednesday, Britain's finance minister Philip Hammond called on the EU to agree to a "mutual recognition" pact for financial services with the bloc and Britain accepting each other's rules to avoid fragmenting markets.

Brussels said a traditional free trade deal, which typically does not include financial services, is on the table.

"Our existing trade agreements give a flavour of how it could look like, but anyway it's less than being part of the single market and it has an impact on the financial sector too," Katainen said.

It was difficult to see how any UK sector would be better placed in the EU than it is at the moment, Katainen said.

"It's the first time we negotiate a trade agreement in order to make trade conditions worse. Always, when we negotiate with third countries, the aim is to improve market access and regulatory environment, and this time it's the other way round."

Reuters