"These three individuals and SVS were a central part of a tangled web which concealed the fact that customers’ pension money was being invested into high-risk bonds."
- Therese Chambers, FCA
The FCA has decided to ban and fine three individuals who were involved in running SVS Securities, a discretionary fund manager.
SVS managed investments held on behalf of its customers. Under FCA rules, the firm was required to act in the best interests of its customers and not let conflicts of interests interfere with its obligations to them.
According to the FCA's investigation, Kulvir Virk, the former CEO and majority shareholder, "recklessly caused SVS to use a complex business model intended to maximise the flow of customer funds into high-risk illiquid bonds". These bonds were operated by directors of SVS and a close business associate of Virk. The model involved inducements to SVS and unauthorised introducers with undisclosed commissions of up to 12% of the customers’ investments.
The FCA said: "The model created systematic conflicts of interests and inappropriately prioritised income to SVS over the best interests of customers."
879 customers paid in a total of £69.1m. Bonds into which they were invested by SVS have since defaulted, with customers unlikely to receive more than a fraction of their investment back.
In the FCA’s view, as head of compliance, David Stephen failed to fulfil his responsibilities to ensure SVS was following the rules. Demetrios Hadjigeorgiou, SVS’s former finance director then CEO, also failed to fulfil his responsibilities to manage conflicts of interest and ensure proper due diligence was carried out.
The FCA found that the three individuals acted recklessly in deciding to mark-down customers’ valuations when they disinvested from fixed income assets, with the result that SVS kept 10% of customer funds. This allowed them to generate £359,800 in income for SVS at the expense of its customers.
The FCA has decided to fine Virk, £215,500; Hadjigeorgiou, £84,600; and Stephen, £52,100. The FCA has also banned Virk from working in financial services and banned Hadjigeorgiou and Stephen from holding senior management roles.
Hadjigeorgiou and Stephen have referred their Decision Notices to the Upper Tribunal where they will each present their respective cases. Any findings are therefore provisional and reflect the FCA’s belief as to what occurred and how it considers their behaviour is to be characterised.
Kulvir Virk has not referred the FCA’s decision to the Upper Tribunal and his Final Notice has not been the subject of any judicial finding.
Therese Chambers, joint executive director of enforcement and market oversight at the FCA, said: "These three individuals and SVS were a central part of a tangled web which concealed the fact that customers’ pension money was being invested into high-risk bonds. Customers were entitled to trust that SVS would act in their best interests, but it repeatedly prioritised income for itself and its associates.
"The actions of those in charge threatened the ability of their customers to enjoy a secure and comfortable retirement. This kind of behaviour has life-changing consequences for consumers."
