By Max Colchester 

LONDON--The City of London is back in the dark over Brexit after this month's U.K. general election muddied the outlook for the U.K.'s departure from the European Union. Banking chiefs here have been left to wonder whether to accelerate plans to move operations into the EU.

Earlier this week Prime Minister Theresa May sealed a deal with a group of Northern Irish lawmakers that will keep her Conservative Party in government despite the loss of its Parliamentary majority. But with Mrs. May's position weakened and a reshuffle of several high-level political backroom staff, the spectrum of Brexit outcomes facing banks has widened.

The likelihood of the U.K. crashing out of the EU without a deal has increased, but equally so has the chance Britain could push for closer ties with the trading bloc, analysts and bankers say.

"A lot is open to debate again," says Stephen Adams, a partner at consultancy Global Counsel.

Pressure from regulators is mounting. By July 14 financial firms in the U.K. must submit plans for life after Brexit to the Bank of England. In particular the central bank wants to know what lenders will do if the U.K. is suddenly cut off from the single market.

Major banks have mostly drawn up their blueprints based on a worst-case scenario. Morgan Stanley, for instance, is expected to finalize a plan in the coming weeks to create a hub in Frankfurt and bulk up several European offices, according to people familiar with the matter. Japan's Daiwa Securities Group Inc. and Nomura Holdings Inc. both announced this week they will also look to move operations to Frankfurt.

But the extent to which the banks will have to execute these plans remains unknown. If the British government opts to negotiate close ties to the EU, then banks may be able to maintain a bigger chunk of their operations in the U.K.

Summer drinks receptions around London's square mile this week were regularly punctuated with bankers lamenting Brexit uncertainty. "We don't know who to call in government," says one public affairs chief at a major British bank. Another joked that the only person who would answer the banks calls was "Larry," the Downing Street cat.

Up until last month investment banks in London were preparing for an exit from the EU's single market and customs union. Several lenders detailed plans to move operations and hundreds of staff into the EU to ensure they could sell to clients there. The lobbying battle had reduced to ensuring banks have enough time to restructure their operations before the U.K. formally quit the trading bloc.

The surprise electoral result upended this. "The election results gave an opportunity to reflect and reset the tone as the U.K. enters negotiations," says Catherine McGuinness, Policy Chairman, City of London Corporation, which promotes the city as a financial services center.

In the days after the vote, banks began to mull a public relations drive via trade associations to push the government to secure greater access to the EU for financial services and soften its stance on immigration, officials say. The momentum stalled as bank staffers struggled to get a clear understanding of the government's thinking on Brexit and which officials they should lobby, officials say.

There have been wholesale changes in government, with key aides to Mrs. May resigning and a new City Minister, whose job is to manage relationships with financial services, appointed. It was the seventh new City Minister in five years.

Some politicians have seemed open to the banks' demands. U.K. Chancellor of the Exchequer Philip Hammond called for comprehensive free trade in goods and services via "a transition that protects the free-flow of trade across our borders," during a speech in Germany on Tuesday. But the position of the U.K.'s Brexit Secretary, David Davis, remains less clear-cut.

"We are in wait and see mode," says one bank executive.

Write to Max Colchester at max.colchester@wsj.com

 

(END) Dow Jones Newswires

June 29, 2017 05:32 ET (09:32 GMT)

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