Britain has left the EU and continued full access to the bloc under a transition arrangement expires on Dec. 31, with the City of London facing patchy access to the bloc in future.

The EU is still deciding on how much direct financial market access it can give Britain under a system whereby Brussels deems British rules to be "equivalent" to its own.

"There is the possibility the negotiating parties don't reach some sensible conclusions on some issues ... then there will be some unexpected disruptions," Charles Randell, chairman of the Financial Conduct Authority (FCA), told a Treasury Select Committee parliamentary hearing.

"It's absolutely in both negotiating parties interests to come to recognition that they do have equivalent regimes ... I am really hopeful that good sense prevails," he added.

Nikhil Rathi, the FCA's new CEO, said there could be disruption in areas such as derivatives trading if Britain and the EU end up with conflicting rules on where investors can trade them.

"We have said we are very open to finding relief there, but it requires both sides to agree on a way forward," Rathi said

The FCA on Wednesday sought to minimise disruption in cross-border share trading after the EU said it would restrict the ability of investors in the bloc to buy and sell EU listed shares in London from January.

Rathi said he was also checking loan impairments at banks as the COVID-19 pandemic hits the ability of borrowers to make repayments, forcing banks to make higher provisions for defaults, with England going into a second lockdown to fight the pandemic from Thursday, to hit more businesses.

"We are not seeing any major concern around impairments and distress ... We are expecting the economic challenges to worsen as unemployment increases in coming months so we need to remain vigilant," Rathi said.

(Reporting by Huw Jones; Editing by Alexander Smith)

By Huw Jones