Central to the argument is whether Brussels deems UK financial rules "equivalent" or aligned with the EU's. Britain says this should be straightforward given both sides have the same rules at the outset.
But last month Brussels said it wouldn't allow banks in London to offer wholesale investment services to EU investors, piling pressure on the City to shift more activity to continental hubs.
"Firms need to carry on doing their 'no deal planning'...it will make cross border business outwards from the UK dependent on country by country analysis and so complicated," said Jonathan Herbst, a financial services lawyer at Norton Rose Fulbright.
ING and BNP Paribas have since announced they will move more trading jobs out of London.
"Selling financial services from the UK to EU clients will not be allowed," BNP Paribas said last week as it announced it would create 400 new jobs in the EU.
Around 330 financial firms had already relocated some business from Britain to the EU, affecting 5,000 staff by October last year, ahead of a short COVID-19 induced pause, said think tank New Financial.
The Bank of England weighed in on Thursday, warning Brussels' move risked disruption to cross-border banking and derivatives trading come January, even if equivalence in other areas was agreed.
"The best that can be expected is a few equivalence agreements by the end of the year," said Karel Lannoo, CEO of think tank CEPS in Brussels.
Another big unknown is whether EU investors can continue trading EU listed shares on platforms run by Cboe, Turquoise and Aquis in London, rather than on a platform inside the bloc.
All three have opened EU hubs as insurance, with final decisions on equivalence not expected until a wider free trade agreement that includes fisheries and other sensitive sectors is hammered out, something that is likely to drag on until at least October.
Aquis is prepared for the worst case scenario of having to switch trading to its new Paris unit, its head of regulation David Attew said.
The European Commission, which wants to deepen the bloc's own capital market, said the EU would grant access when it was in its own interests to do so.
The "weaponisation" of equivalence so far was a taster of what's to come, a UK banking official said. "Are you going to be comfortable with building a business model on that"
Britain also needs to decide what access EU firms will have to its financial markets.
"For business coming in, it all depends on how the UK authorities react to a world of what is effectively one way access," Herbst said.
Britain's finance ministry has said it is ready to reach comprehensive findings of equivalence as soon as the EU is able to clarify its own position.
But Conor Lawlor, Capital Markets and Brexit Director at banking lobby UK Finance, said lenders should focus on getting "match fit" for Britain's updated regulatory regime, which weaves EU financial rules into UK law, to avoid snarls next January.
"The industry continues to plan on the basis that there will be a minimalist approach to equivalence decisions," Lawlor said.
($1 = 0.7628 pounds)
(Reporting by Huw Jones; editing by Rachel Armstrong, Kirsten Donovan) ((email@example.com; +44 207 542 3326; Reuters Messaging: firstname.lastname@example.org))