Switzerland faces the threat of financial sanctions from the EU after failing on Friday to endorse a deal aligning the small Alpine nation more closely with the bloc.

In a decision which could have ramifications for the UK post-Brexit, the seven-strong Swiss federal council, or cabinet, declined to formally agree a proposed new “institutional framework” governing EU trading relations with Switzerland, a non-EU member.

Instead, Bern announced it would launch a “consultation” across Switzerland lasting until next spring.

The decision amounts to a snub to the EU, which since the UK Brexit vote in 2016 has sought to redraw its relations with “third countries”.

It opens the way for retaliation by Brussels, which had previously warned that a first step would be the withdrawal of “equivalence” status for the Swiss stock exchange — meaning EU banks and brokers will not long be able to trade there.

The political weaponising of what should be a technical decision about equivalence sets a potentially worrying precedent for the UK’s financial sector, which is likely to face a similar regime post-Brexit.

Despite being surrounded geographically by EU countries, Switzerland has refused to join the bloc ever since a 1992 referendum rejected joining the European Economic Area, which would have been a stepping stone towards membership. Instead, trading relations are based on more than 120 bilateral contacts.

The proposed “institutional framework” Brussels wanted Bern to sign was sensitive since it would mean Swiss rules changed in line with EU law and give the European Court of Justice a role in resolving conflicts.

Sticking points over the deal focused on measures protecting high wages in Switzerland and the treatment of EU citizens in the country.

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