The UK Financial Conduct Authority (FCA) has decided to ban and fine three people involved in the management of SVS Securities Plc, a discretionary fund manager.
The three individuals are: Kulvir Virk, David John Alexander Stephen and Demetrios Christos Hadjigeorgiou.
SVS managed investments held on behalf of its clients. Under FCA rules, the firm had to act in the best interests of its clients and not let conflicts of interest interfere with its obligations to them.
Kulvir Virk, the former CEO and majority shareholder, recklessly led SVS to use a complex business model aimed at maximizing the flow of client funds into high-risk illiquid bonds. These bonds were managed by directors of SVS and a close business associate of Mr Virk.
The model involved incentivizing SVS and unauthorized importers with undisclosed fees of up to 12% of customers’ investments. The model created systematic conflicts of interest and improperly prioritized SVS’s income over the best interests of clients.
The regulator estimates that 879 customers paid a total of £69.1m. Bonds invested in by SVS have since defaulted, with clients unlikely to get more than a fraction of their investment back.
In the FCA’s view, as Head of Compliance, David Stephen failed to fulfill his responsibilities to ensure that SVS followed the rules. Dimitrios Hatzigeorgiou, SVS’s former CFO, then CEO, also failed to fulfill his responsibilities for managing conflicts of interest and ensuring due diligence.
The FCA found that the three individuals acted recklessly when they decided to reduce client valuations when they disinvested from fixed income assets, resulting in SVS holding 10% of client funds. This allowed them to generate £359,800 in revenue for SVS at the expense of its customers.
The FCA decided to fine Mr Virk £215,500. Mr Hatzigeorgiou, £84,600; and Mr Stephen, £52,100. The FCA banned Mr Virk from working in financial services and decided to ban Mr Hatzigeorgiou and Mr Stephen from senior management roles.
On 2 August 2019, the FCA took action to require SVS to cease all regulated activities, safeguard assets and notify affected third parties. SVS was placed into Special Administration on August 5, 2019.