Discretionary Fund Managers at SVS Securities Banned in £69m Bond Scheme

By Published On: 25 June 2024

The Financial Conduct Authority (FCA) has taken action against three individuals involved in a controversial scheme that saw SVS Securities, a discretionary fund manager (DFM), receive substantial commissions for investing £69.1 million of clients’ pensions into high-risk bonds.

Former CEO and majority shareholder of SVS Securities, Kulvir Virk, has been fined £215,500 and permanently banned from working in financial services. Meanwhile, former director Demetrios Hadjigeorgiou and head of compliance David Stephen were collectively fined £136,700 and barred from senior management roles. Both Hadjigeorgiou and Stephen are appealing this decision at the upper tribunal.

The FCA’s investigation revealed that Virk, with the assistance of Hadjigeorgiou and Stephen, prioritized personal gains over the welfare of their clients, jeopardizing the pensions of hundreds of individuals. Operating from 2003 to 2023, SVS Securities had developed a business model where clients were funneled into discretionary model portfolios, 63% of which were invested in high-risk bonds.

These bonds, which included investments in a bridging loan company and a startup lender, provided SVS Securities with commissions ranging from 10% to 12% taken from clients’ investments. Many of these bonds, managed by SVS directors and a close associate of Virk, have since defaulted, according to the FCA.

To attract clients to its model portfolios, SVS Securities paid unregulated introducers commissions between 7% and 9%. These introducers referred clients to specific financial advisers, who then recommended the high-risk investments. Notably, two advisers, responsible for advising 539 of the 879 model portfolio customers, had cross-shareholdings with an introducer linked to a marketing agreement authorized by Virk.

Overall, £69.1 million of client funds were invested in these high-risk bonds. The FCA stated, “The model created systematic conflicts of interests and inappropriately prioritized income to SVS over the best interests of customers.”

Conflicts of Interest Exposed

SVS Securities’ business practices were riddled with conflicts of interest, notably commercial agreements initiated by Virk. This included a deal with bond provider Ingard, which had one of SVS’s co-directors on its board.

In a desperate bid to address liquidity and cash flow issues in November 2018, Virk entered SVS into a precarious agreement with secured lending provider Innovation Capital Finance. This deal promised SVS £1 million in commission, with £750,000 paid upfront, despite no due diligence being conducted.

Following a visit by the FCA in July 2019, SVS Securities agreed to cease all regulated activities on 2 August 2019. Just three days later, the firm was placed into special administration.

Therese Chambers, the FCA’s joint executive director of enforcement and market oversight, stated, “SVS and these three key figures played a significant role in a convoluted scheme that obscured the truth about customers’ pensions being allocated to high-risk bonds. Their actions jeopardized the future financial security of their clients, leading to potentially devastating consequences for many consumers.”

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Written by : HTLEGAL

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