Vanguard’s £40 Billion Fund Tangled in Dispute Over City of London Rules

Vanguard Group’s largest UK fund range has become the focus of a growing debate about how the financial watchdog is enforcing a rule in the City of London.

(Bloomberg) — Vanguard Group’s largest UK fund range has become the focus of a growing debate about how the financial watchdog is enforcing a rule in the City of London.

The US money manager’s LifeStrategy funds, a group of five vehicles that collectively manage about £40 billion ($48.6 billion), appear to have breached Financial Conduct Authority asset concentration limits. Vanguard says it has repeatedly engaged with the regulator and is satisfied with its approach, but the FCA’s public silence on the matter is leaving some market participants ever more perplexed about how to apply a rule that’s long stoked confusion.

“The industry would welcome the clarification,” said Richard Slattery-Vickers, partner at ConBrio Fund Partners. “If one firm is going to interpret it in one way and another in a different way that’s not fair to investors in the management and administration of products provided to them. We’re all here for the consumer at the end of the day and we should all be following the same rules, to be applied consistently.”

Lawyers and fund administrators say the lack of clarity undermines the integrity of the investment industry and feeds a narrative that its rules only apply to some firms. They say it raises concerns about how clearly the FCA is explaining its regulations, and how consistently it is enforcing them.

The watchdog is aware that the rule has caused confusion over the years due to its similarity with some European regulations and it has had a number of discussions with firms and their legal representatives about it, according to a person familiar with the discussions. The FCA is considering how to address the rule as part of its work on the future asset management regime, the person said. 

“Through our engagement with the FCA, we are satisfied that our LifeStrategy funds meet applicable diversification/concentration requirements,” a Vanguard spokesperson said in an emailed statement. “We have sought clarity on the matter with the FCA and legal representatives several times.”

The FCA declined to comment on its interaction with the asset manager. 

Bundled Funds

Vanguard’s LifeStrategy –- a range of five UK-domiciled funds bundled together as an umbrella – is registered as a UCITS fund, a regulatory structure that allows mutual funds to be sold across EU countries.

Under the FCA’s rulebook, such funds are allowed to own up to 25% of the units of another vehicle that is registered as a collective investment scheme. The rules state that if a fund range is structured as an umbrella — as is the case with the LifeStrategy funds — then the concentration limit applies to the total of all the funds added up. 

LifeStrategy’s funds invest in other funds that are also managed by Vanguard. In aggregate, they own about 40% of a single other vehicle: the £12 billion Vanguard FTSE UK All Share index fund, which is registered as a collective investment scheme, according to the most recent publicly available fund documents. 

While this appears to be significantly above the FCA’s allowed limit, Vanguard doesn’t appear on the FCA’s latest waiver-and-modification list, which shows firms that have been granted special permission to act outside the rulebook.

“You either have the rule and people have to follow it, or you don’t,” said Andrew Clare, professor of asset management at Bayes Business School in London. 

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