Photo taken on Oct. 21, 2014 shows an interior view of the London Stock Exchange (LSE). (Xinhua/Wu Xintao)

LONDON, Jan. 27 (Xinhua) -- Britain's financial services sector, concentrated in the City of London, risks market fragmentation and instability if a future deal with the European Union cannot be agreed, a committee of House of Lords politicians warned Saturday.

The EU Financial Affairs Sub-Committee issued their warning after conducting an inquiry into the future of financial regulation and supervision after Brexit.

The report highlights the risks of market fragmentation and instability if Britain and the EU cannot agree a deal on market access once the UK has left the bloc.

"The government must urgently clarify what outcome it wants from phase two of Brexit negotiations and on transitional arrangements, or firms will be forced to activate costly and potentially irreversible contingency plans," says the report.

Baroness Falkner, who chairs the committee in the unelected House of Lords at Westminster, said: "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. The UK's financial services sector is a global asset and both sides should want it to continue serving clients throughout Europe.

"The financial services sector needs greater clarity from the government about what it wants after Brexit, and it needs it now. A transition period is meaningless without a destination."

Falkner added that Brexit is an opportunity to tailor the regulatory regime to strengthen the UK's financial services sector. But she said Britain 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 report concludes: "The translation of EU regulation into domestic law will need delicate handling by the government. Some rules will need to be enshrined in statute. It is vital that Brexit, in transferring powers to domestic regulators, should not result in an unintended deficit in democratic scrutiny and accountability."

A report by the London School of Economics (LSE) in 2017 said financial and professional related services in Britain employed 2.2 million people, generating 270 billion U.S. dollars for Britain's GDP.

The study estimated roughly half of Britain's Financial Services revenues are in wholesale and international business, with up to 62 billion U.S. dollars directly related to the EU. It could put up to 65,000 jobs in the sector at risk, the LSE report added.

Looking at the possible impact on the City of London, the LSE report said London will likely see some reduction in Financial Services sector activity, but will likely remain an EMEA (Europe, Middle East and Africa) hub.

In a report earlier this month, London mayor Sadiq Khan warned an independent analysis feared the worse scenario in a no-deal hard-Brexit could lead to half a million fewer jobs in Britain, with financial and professional services the hardest hit. That sector, he said, could lose 119,000 jobs.

The next round of negotiations between Britain and the EU on a future relationship deal are due to start soon.