SCOTLAND’S financial industry is set to be hit far harder than London by Brexit after European chiefs ruled out giving firms a special arrangement to trade freely in the EU once the UK has left the bloc.

The prospect of major damage to thriving insurance and banking firms in Edinburgh and Glasgow follows Europe’s chief Brexit negotiator rejecting any bespoke deal for the sector if Britain pulls out of the single market.

In an interview published yesterday, Michel Barnier made clear he was not open to a free trade agreement including financial services, which Theresa May and Brexit Secretary David Davis have called for.

“There is no place [for financial services],” Barnier said. “There is not a single trade agreement that is open to financial services. It doesn’t exist.”

Describing the position as a result of “the red lines that the British have chosen themselves”, he stated: “In leaving the single market, they lose the financial services passport.”

Last year the huge impact of pulling out of the single market and the absence of any bespoke deal for financial services was underlined in a report presented to MSPs.

It said that apart from Luxembourg, Edinburgh depends more on banking and finance than any other European city, accounting for 24 per cent of its economy, six per cent more than London’s.

The findings by analysts at 4-Consulting concluded: “Edinburgh’s economy is more reliant on financial services than the London economy or any UK city economy.

“Edinburgh’s share of financial services is markedly ahead of most large European cities.

“Additional data published by Eurostat shows Edinburgh’s economy is more reliant on financial services than any other European city apart from Luxembourg.

“The latest available data from the Office for National Statistics (ONS) shows that financial services accounted for a higher share of Edinburgh’s economy (23.8 per cent) than London (18.9 per cent) or any other city in the UK.”

In response, SNP MSP Mairi Gougeon said: “These comments by Michel Barnier show once more the damage that the Tories’ extreme Brexit is set to cause to Scotland.

“The financial sector supports tens of thousands of jobs and contributes billions to our economy every year.

“Any threat to this from Tory plans to drag us out of the single market are completely unacceptable.

“The SNP has been consistent from the start – the only way to support Scotland’s economy is by remaining in the single market. Anything less needlessly risks severely damaging our economy and job prospects for decades to come.”

LibDem Brexit spokesman Tom Brake said: “We are now starting to see the real potential costs to ripping up our trade deal with Europe.”

Barnier’s warning was issued on the eve of the first full Cabinet discussion of the “end state” which the UK is aiming for in upcoming negotiations on Britain’s future relationship with the EU.

He repeated the EU’s position set out in Brussels last week that the UK must follow all EU rules during the expected two-year transition period following the official date of Brexit in March 2019 – which will include laws introduced during that time with no British input into decisions.

And while Britain can negotiate trade deals with other countries during the transition, they cannot enter into force until the period is over, probably in 2021.

He said he believed that a UK/EU free trade deal could be agreed within the two-year transition, but said it would have to be ratified by more than 35 national and regional parliaments across the EU27, each of which holds a veto.

May has repeatedly made clear that she intends to take Britain out of the single market and customs union after Brexit, effectively ruling out Norway-style free access to trade with the EU27.

But she has suggested that a “deep and special partnership” with the EU should be more extensive than the agreement struck with Canada in 2016, which covers goods but not services.

Brexit Secretary David Davis has called for a “Canada plus plus plus” deal which would include financial services.

Barnier made it clear that the EU will respond firmly to any deviation from the framework of single market regulations which might give the UK a competitive advantage through lower taxes or weaker standards.

A UK Government spokesman said: “The EU has said they will offer their most ambitious free trade approach. We are confident of negotiating a deep and special economic partnership that includes a good deal for financial services – that will be in the EU’s best interests, as well as ours.”