The City of London's top watchdog tried to blame Neil Woodford's fund woes on shortcomings in European Union regulations, suggesting oversight would be easier after Brexit.
But Brussels is having none of it.
Supervisors such as the U.K. Financial Conduct Authority just need to do their jobs overseeing markets and enforcing regulations that are devised by all the members of the 28-nation bloc, the European Commission said on Wednesday.
"We see no immediate reason for changing rules which are, in our view, clear but need to be applied properly by national authorities in order to ensure the intended protection of investors," the Brussels-based commission said. The turmoil surrounding Mr. Woodford's decision to freeze withdrawals from his flagship fund "seems to be a supervisory issue concerning the application of the EU rules."
The statement comes a day after FCA Chief Executive Andrew Bailey told a meeting of the U.K. Parliament's Treasury Committee that some of the shortcomings revealed in Mr. Woodford's case were the result of loopholes in an overly complicated European system.
The spat reveals a deep-rooted disagreement between Britain and the EU about how best to regulate finance. The U.K. wants fewer details written in legislation and more authority granted to regulators to respond to threats. The need to forge consensus among the disparate nations in the EU however often produces granular laws that evolve over years of negotiations.
In recent weeks, British financial authorities have become increasingly critical of the EU method of regulation, with both Mr. Bailey and Sam Woods, chief of the Bank of England's Prudential Regulation Authority, saying that Britain should take advantage of Brexit by pursuing the British style of oversight.
The current tiff centers on Mr. Woodford, one of the U.K.'s most famous stock pickers, who suspended withdrawals from his LF Woodford Equity Income Fund this month as he struggled to meet redemption requests. The FCA is examining how the fund was listing some investments on the Guernsey stock exchange to adhere to a 10% cap on unquoted securities.
Mr. Bailey said Woodford's managers were able to engage in "regulatory arbitrage" by exploiting gaps in the EU law known as UCITS. The mutual fund rules are an "excessively rules-based system, and that's a feature of much of the EU's system," Mr. Bailey said.