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* HSBC, Barclays say EU has been crucial to London success
* HSBC could realign some ops to continent after a Brexit
* Bankers see limited room for UK rule changes outside EU
By Huw Jones
LONDON, Jan 6 (Reuters) - Britain's financial sector hasthrived in the European Union and quitting the 28-country bloccould limit access to a huge market and trigger an "investmentpause" due to inevitable disruptions, senior bankers toldlawmakers on Wednesday.
Britain is expected to hold a referendum on EU membershiplater this year.
Prime Minister David Cameron wants to keep Britain in thebloc if he can persuade other EU leaders to agree to his demandsfor reform before the vote, though he has cautioned he couldcampaign to leave if he doesn't get a deal.
Eurosceptic lawmakers have criticised Brussels for pilingnew rules on banks in Britain at the risk of making the sectorless competitive globally.
Officials from two UK banks, HSBC and Barclays, said access to the EU's single market and its commonrules was "crucial" and a key factor in London's success asEurope's biggest financial centre.
"Harmonisation does make it easier for us," James Chew,HSBC's head of regulatory policy, told parliament's TreasurySelect Committee.
London's financial strength outside the EU would hinge onwhether there was a "soft" or "hard" exit, meaning howaccommodative terms of business would be with Europe, Chew said.
"We know that under any circumstances it's going to be avery big disruption," Chew said. "There will undoubtedly be somesort of investment pause."
HSBC could be forced to "realign" some operations on thecontinent if access to the single market was restrictedfollowing a British exit, Chew said.
It would take time for the economic consequences of a"Brexit" vote to sink in, such as whether China would focus ondeveloping relations with the EU, rather than with Britain, headded.
Mark Astaire, vice chair of Barclays' investment bankingunit, said that while London had thrived within the EU and thesingle market was crucial, the capital would remain Europe'sbiggest financial centre in 10 years' time even if Britain leftthe bloc.
But Barclays' business customers say it makes sense to stayin the EU from an economic point of view, and an exit would bean expensive exercise for the bank and risks Britain beingsidelined when it comes to shaping financial rules, he added.
HSBC and Barclays have begun Brexit contingency planning butAstaire and Chew were unable to give a figure for the costs ofexit. The government should set out the terms of any exit aheadof the vote to help banks prepare, they said.
Some lawmakers argued Britain could create a morecompetitive financial services sector by setting its ownfinancial rules outside the EU. HSBC is reviewing whether tokeep its head office in London or move to Asia or elsewhere,partly to escape heavy regulation.
Chew said most EU rules were based on globally-agreedprinciples, and Britain had introduced tougher versions in somecases.
The EU has imposed conditions on non-EU countries that wantto do business in the single market, such as having equallystrict regulation of their own.
Astaire said the ability of a Britain outside the EU to makeradical changes to its financial rules would be quite limited.
"It would not be easy to go very far," agreed Chew. (Editing by Mark Potter)
