1

DECISION NOTICE

Reference
Number:
DJS01438

1.
ACTION

1.1.
For the reasons given in this Decision Notice, the Authority has decided to:

(1)
impose on David John Alexander Stephen a financial penalty of £52,100

pursuant to section 66 of the Act; and

Demetrios Hadjigeorgiou and David Stephen have referred their Decision
Notices to the Upper Tribunal where they will each present their respective
cases. Any findings in these individuals’ Decision Notices 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. To the extent that
Kulvir Virk’s Final Notice contains criticisms of Demetrios Hadjigeorgiou and
David Stephen, they have received Decision Notices which set these out. They
dispute many of the facts and any characterisation of their actions in Kulvir
Virk’s Final Notice and have referred their Decision Notices to the Upper
Tribunal for determination. The Tribunal's decision in respect of the
individuals' references will be made public on its website.

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(2)
make an order prohibiting Mr Stephen from performing any senior

management function and significant influence function in relation to any

regulated activities carried on by any authorised or exempt person, or

exempt professional firm pursuant to section 56 of the Act.

2.
SUMMARY OF REASONS

2.1.
On the basis of the facts and matters described below, the Authority considers

that between 3 January 2018 and 2 August 2019 (the “Relevant Period”),

Mr Stephen breached Statement of Principle 1 (Integrity) and Statement of

Principle 6 (Due skill, care and diligence) of the Authority’s Statements of Principle

and Code of Practice for Approved Persons Chapters of the Authority’s Handbook

(“APER”) by failing to act with integrity and by failing to exercise due skill, care

and diligence in managing the business of SVS Securities Plc (“SVS”).

2.2.
During the Relevant Period, Mr Stephen was the Head of Risk and Compliance at

SVS and held the controlled functions of CF10 (Compliance Oversight) and CF11

(Money Laundering Reporting). SVS operated a discretionary fund management

business that managed investments held on behalf of retail pension customers

within a self-invested personal pension (“SIPP”). The pension funds within the

SIPPs were then invested into one of four portfolios of assets created and

managed by SVS (the “Model Portfolios”). The Model Portfolios were called Income

/ Mixed / Growth / Aggressive Growth and SVS’s marketing material described

them as being ‘high risk portfolios designed to give you maximum growth

opportunities’.

2.3.
Discretionary fund managers act as agents for their customers, making

investment decisions in financial markets on their behalf. Confidence that

discretionary fund managers will conduct themselves properly when acting on

behalf of customers is central to the relationship of trust between the industry

and its customers. When making investment decisions for customers,

discretionary fund managers should act in the best interests of their customers

and should not let conflicts of interest interfere with their obligations to customers.

The Authority has stressed the importance of discretionary fund managers

managing conflicts of interest effectively.

2.4.
A business model was operated at SVS that maximised the flow of retail customer

funds into the Model Portfolios for onward investment into high-risk illiquid bonds

operated by connected persons and business associates of SVS. This model, which

inappropriately prioritised income to SVS at the expense of the firm’s customers,

operated throughout the Relevant Period and was driven by the financial benefit

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that SVS derived from commissions of up to 12% of the customer’s investment,

paid to SVS out of the principal which SVS customers invested in the bonds.

2.5.
SVS entered into a series of commission-driven commercial arrangements with

these bond operators that committed SVS to channel customer funds into the

high-risk fixed income bonds. The model relied upon incentivising unauthorised

introducers through marketing agreements by which SVS paid these introducers

commission of 7-9% of the introduced customer’s funds that were invested into

SVS’s Model Portfolios. A total of 879 customers invested £69.1 million into the

Model Portfolios. Over half of these customers were advised to invest in SVS by a

financial adviser firm that was wholly or partly controlled by the owners of one of

the introducers to whom SVS was secretly paying incentive commission.

2.6.
At a time when SVS had financial concerns, and in order to generate more income,

SVS decided to apply a 10% mark-down on the valuation that customers would

receive when they disinvested from the fixed income assets in the Model

Portfolios. This mark-down was not notified to existing or prospective investors.

Mr Stephen actively supported the implementation of the decision yet chose to

dismiss multiple concerns raised with him that the mark-down was not fair to

customers. As a consequence, he was reckless regarding these concerns and the

known risk that customers would be treated unfairly.

2.7.
Mr Stephen was aware that the purpose of the mark-down was to generate

revenue for SVS. Indeed, SVS earned £359,800 in income at the expense of its

customers. Despite knowing of the concerns over the risks to customers, Mr

Stephen nonetheless chose to support the arrangement.

2.8.
Furthermore, he recklessly failed to take steps to ensure that SVS complied with

regulatory standards both in terms of the change and its communications to

customers or their financial advisers. This meant that customers were

detrimentally affected, as they did not have the opportunity to consider the

potential impact of the mark-down when deciding to disinvest. Even when a

disclosure was eventually made to customers by SVS, some six months later, as

Mr Stephen well knew, it did not specify the 10% mark-down.

2.9.
SVS considered the Model Portfolios to be high risk products. However,

Mr Stephen failed to take reasonable steps to ensure that only customers with a

high attitude to risk were accepted by SVS. He was aware that financial advisers

advised lowest medium and high medium risk customers to invest in the Model

Portfolios yet took no action to address the risk this created for those customers:

instead of taking reasonable steps to ensure that SVS properly assessed for

appropriateness by determining the needs, characteristics and objectives of the

Model Portfolio customers, Mr Stephen as CF10 unreasonably relied on financial

advisers to do this. As a result of this failure, SVS continued to accept customers

from financial advisers even though the Model Portfolios had a higher level of risk

than these customers were willing or able to bear.

2.10.
Mr Stephen failed to take reasonable steps to ensure that SVS complied with the

Authority’s rules in relation to inducements. SVS received large commission

payments from fixed income product providers in return for including their

investments in the Model Portfolios. This represented a level of inducement which

put at risk SVS's independence and compromised its ability to act in the best

interests of its customers. COBS 2.3A.15R, which came into force on 3 January

2018, states that a firm must not accept any commission from any third party in

provision of a relevant service to retail clients. As the Head of Risk and Compliance

Mr Stephen should have ensured that SVS did not accept such payments after 3

January 2018.

2.11.
The Authority has concluded that in respect of the matters in paragraphs 2.6 to

2.8, Mr Stephen failed to act with integrity, in breach of Statement of Principle 1,

and that in respect of the matters in paragraphs 2.9 to 2.10, he failed to exercise

due skill, care and diligence in managing the business of SVS, in breach of

Statement of Principle 6.

2.12.
In addition, as a result of his conduct, the Authority considers that Mr Stephen is

not a fit and proper person, and he poses a risk to consumers and to the integrity

of the financial system. The nature and seriousness of the breaches outlined above

warrant the imposition of an order prohibiting him from performing any senior

management function or significant influence function in relation to any regulated

activities carried on by an authorised or exempt person or exempt professional

firm.

2.13.
Further, the Authority considers it appropriate to impose a financial penalty on

Mr Stephen of £52,100 for his breaches of Statement of Principle 1 and Statement

of Principle 6 during the Relevant Period.

3.
DEFINITIONS

3.1.
The definitions below are used in this Notice:

“the Act” means the Financial Services and Markets Act 2000.

“Mr Anderson” means Stuart James Anderson.

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“Angelfish” means Angelfish Investments Plc.

“APER” means the Statements of Principle and Code of Practice for Approved

Persons.

“the Authority” means the Financial Conduct Authority.

“CFBL” means Corporate Finance Bonds Limited.

“CFBL Bonds” means various series of bonds issued by CFBL under its £500m

secured note programme, launched on 21 June 2016.

“COBS” means the part of the Authority’s Handbook entitled “Conduct of Business

Sourcebook”.

“DEPP” means the Decision Procedure and Penalties Manual part of the Authority’s

Handbook.

“EG” means the Authority’s Enforcement Guide set out in the Authority’s

Handbook.

“FIT” means the Fit and Proper Test for Approved Persons and specified

significant-harm functions section of the Authority’s Handbook.

“the FSCS” means the Financial Services Compensation Scheme.

“the Handbook” means the Authority’s Handbook of rules and guidance.

“ICFL” means Innovation Capital Finance Limited.

“ICFL Bond” means the bond issued by ICFL under its £100m secured note

programme, launched on 17 January 2019, in respect of which SVS made an

investment of £10m.

“IFA” means Independent Financial Adviser.

“Ingard” means Ingard Limited.

“Ingard Alternative Funding” means Ingard Alternative Funding Limited.

“Ingard Financial” means Ingard Financial Limited.

“Ingard Property Bond 1” means the bond issued by Ingard Property Bond

Designated Activity Company.

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“Ingard Property Bond 2” means the bond issued by Ingard Property Bond 2

Designated Activity Company.

“Ingard Property Bonds” means Ingard Property Bond 1 and Ingard Property Bond

2.

“Investment
Committee” means the committee providing oversight on

discretionary and advisory services offered, it handles the products in the model

portfolio and monitors the investment performance.

“Mark-down” means the difference, if any, between:

(i) the price at which the firm takes a principal position in the relevant

investment in order to fulfil a customer order; and

(ii) the price at which the firm executes the transaction with its customer.

“MiFID II” means the Markets in Financial Instruments Directive (2014/65/EU).

“Model Portfolios” means the discretionary fund managed model portfolios

managed by SVS.

“Model Portfolio Team” means the SVS staff responsible for the Model Portfolios.

“OC Finance” means OC Finance S.A.

“OC Finance Bonds” means bonds issued by OC Finance.

“PROD” means the part of the Authority’s Handbook entitled “Product Intervention

and Product Governance Sourcebook”.

“Prohibition Order” means the order to be made pursuant to section 56 of the Act

prohibiting Mr Stephen from performing any senior management function and any

significant influence function in relation to any regulated activity carried on by any

authorised person, exempt person or exempt professional firm.

“Queros” means Queros Capital Partners PLC.

“RDC” means the Regulatory Decisions Committee of the Authority (see further

under Procedural Matters below).

“the Relevant Period” means the period between 3 January 2018 and 2 August

2019.

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“SIPP” means a self-invested personal pension. A SIPP is the name given to the

type of UK government-approved personal pension scheme, which allows

individuals to make their own investment decisions from the full range of

investments approved by Her Majesty’s Revenue and Customs.

“SIPP Trustee” means the trustee and administrator of the SIPPs used to invest

in the Model Portfolios.

“Specialist Advisors” means Specialist Advisors Limited.

“the Statements of Principle” means the Statements of Principle as set out in

APER.

“Mr Stephen” means David John Alexander Stephen.

“SVS” or “the firm” means SVS Securities Plc.

“SYSC” means the part of the Authority’s Handbook entitled “Senior Management

Arrangements, Systems and Controls”.

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber).

“Mr Virk” means Kulvir Virk.

“the Warning Notice” means the Warning Notice dated 17 February 2023 given to

Mr Stephen.

4.
FACTS AND MATTERS

4.1.
SVS was regulated by the Authority from 9 April 2003 to 31 August 2023. It had

permission under Part 4A of the Act to carry out a range of regulated advisory

and transactional activities. Its principal business activities included: advising on

investments, dealing in investments as agent, dealing in investments as principal,

managing investments, arranging safeguarding and administration of assets, and

safeguarding and administration of assets.

4.2.
SVS’s four main services, or business areas, were:

1)
Advisory - traditional stockbroking services (private client broking) on an

advisory basis to both retail and Institutional clients. This also included

taking part in AIM listings and secondary placings on a principal basis;

2)
Discretionary - investments into the Model Portfolios by one of the SVS

discretionary team;

3)
Execution only - online equity, ISA, SIPP trading on an execution only basis;

and

4)
Foreign exchange trading - Retail online execution only foreign exchange

business that operated under the trading name of SVSFX.

4.3.
Mr Stephen was first approved by the Authority to perform the CF10 (Compliance

Oversight) and CF11 (Money Laundering Reporting) functions at SVS on 6 August

2014. He held these roles during the Relevant Period. His responsibilities included

providing the decision-making framework for responding to, and adjudicating,

third party queries and complaints. Mr Stephen was also responsible for

responding to all information requests from the Authority, including in relation to

the Model Portfolio.

4.4.
The Authority received a number of complaints from customers about the Model

Portfolios in early 2019. On 13 May 2019, the Authority requested that SVS

provide information about the due diligence that it had conducted on investments

within its Model Portfolios. On 2 July 2019, the Authority conducted a site-visit at

SVS’s offices.

4.5.
The information gathered by the Authority from SVS raised serious concerns and

on 26 July 2019, at the request of the Authority, SVS applied for requirements to

be imposed on it. Requirements were imposed on the firm on the same date.

Under the voluntary requirements SVS agreed to cease all regulated activities in

relation to its discretionary fund management business and not to accept any new

customers into, or invest any fixed income provides in, any of its other business

areas.

4.6.
On 2 August 2019, the Authority imposed further requirements on SVS requiring

it to cease all regulated activities, safeguard assets and notify affected third

parties.

4.7.
On 5 August 2019, SVS was placed into Special Administration. The Special

Administration ended on 30 March 2023 and SVS was dissolved on 10 August

2023.

4.8.
The FSCS started considering claims from Model Portfolio customers on 10 August

2020.

The Model Portfolios and Underlying Investments

Creation and Structure of the Model Portfolios

4.9.
During the Relevant Period, 879 retail customers invested £69.6 million in the

Model Portfolios. The vast majority of the customers who invested in the Model

Portfolios were retail customers transferring their pensions from existing pension

plans, including customers who had transferred from defined benefit pension

schemes.

4.10.
The Model Portfolios were created by SVS as part of its discretionary fund

management business. The Model Portfolios were broken down into four separate

portfolios: Income, Mixed, Growth and Aggressive Growth. They purported to

invest in a mixture of equities, fixed income and collective funds which could be

tailored to meet different customer objectives. Of the total £69.6 million invested

in the Model Portfolios, around 73% of the invested monies were allocated to the

fixed income products.

Governance of the Model Portfolios

4.11.
The SVS Board of Directors was responsible for ‘oversight and overview’ of the

4.12.
Separate from the Board of Directors, there were a number of committees with

formal governance responsibilities for the Model Portfolios. These included a Model

Portfolio Strategic Investment Committee (the “Investment Committee”), a Fixed

Income Investment Committee, a FTSE Investment Committee, a Small Cap

Investment Committee and a Funds / Yield Investment Committee. Mr Stephen

was not a member of any of these committees. As Head of Compliance and Risk,

he was responsible for approving all marketing materials, and for providing advice

on the form and content of customer statements and the future strategy of the

4.13.
The Model Portfolio Team had overall responsibility for the Model Portfolios,

convening Investment Committee meetings, producing management information,

devising and implementing operational strategy, ensuring that introducer and

financial advisers were ‘properly serviced’, dealing with disinvestments, and

onboarding new clients.

Features of the Model Portfolios

4.14.
The Model Portfolios were discretionary managed portfolios which aimed to deliver

a strategy of capital growth and income through asset allocation.

4.15.
By July 2019, the fixed income asset class comprised the following high risk,

corporate bonds and preference shares:

1)
CFBL Bonds;

2)
Ingard Property Bonds;

3)
ICFL Bond;

4)
Angelfish preference shares; and

5)
Queros.

CFBL Bonds

4.16.
At the start of the Relevant Period, SVS had already invested Model Portfolio funds

into the OC Finance Bonds, which were fixed income products. In 2016, Mr

Anderson established CFBL as a new vehicle to attract fixed income investment.

CFBL issued a £500 million secured note programme which launched on 21 June

2016. The stated aim of the programme was to provide UK companies with

development capital to grow their business - through accelerated growth plans,

acquisitions or realisation of new opportunities. It purported to achieve this by

issuing bonds and then using the capital to lend to such businesses on a secured

basis.

4.17.
The CFBL £500 million secured note programme was approved by the Irish Stock

Exchange on 21 June 2016. Each series of the CFBL Bonds was listed on the Global

Exchange Market of Euronext Dublin. The OC Finance Bonds, into which SVS had

already invested Model Portfolio funds, were rolled into the CFBL Bond programme

as Series 1 and Series 2. There were eight different series of the CFBL Bonds. The

bonds were issued with a fixed rate of interest (either 5.95% or 6.25%) for a fixed

term of 4.5 or 5 years. The CFBL Bonds had maturity dates between 7 July 2021

4.18.
Between 16 February 2016 and 1 July 2019, SVS invested into six series of the

CFBL Bonds. As at 1 July 2019, a total of £23,912,255 of SVS customer funds was

invested in the CFBL Bonds via the Model Portfolios. This represented 29% of all

funds in the Model Portfolios. Over half of the fixed income investments in the

Model Portfolios were invested in CFBL Bonds.

4.19.
In return for investing SVS customer funds into the CFBL Bonds, CFBL paid SVS

commission of 10-12% of the funds invested. The CFBL Bonds were delisted on 6

November 2019 due to the economic environment and to save costs.

4.20.
By 29 April 2020, the CFBL Bonds had defaulted on coupon payments. With effect

from 18 May 2020, Heritage Corporate Finance Ltd replaced CFBL as the issuer of

the bonds. Customers are only expected to recover between 20-35% of the value

of their investments in the CFBL Bonds.

4.21.
SVS included Ingard Property Bond 1 and Ingard Property Bond 2 in the Model

Portfolios. The stated purpose of both bonds was to provide bridging loans to the

UK property market. Both bonds were listed on the Cyprus Stock Exchange.

4.22.
Both bonds were issued with a fixed rate of interest (either 5.75% or 7%) for a

fixed term of 7 years. Ingard Property Bond 1 matured on 31 December 2023 and

Ingard Property Bond 2 is due to mature on 31 December 2025. In January 2017

SVS invested Model Portfolio customer funds into Ingard Property Bond 1 and in

December 2017, SVS invested Model Portfolio customer funds into Ingard

Property Bond 2, in each case in return for commission of 12% of the customer

funds invested. As at 1 July 2019, SVS had invested £5.7 million into the Ingard

Property Bonds. This represented 7% of the total funds in the Model Portfolios.

ICFL Bond

4.23.
ICFL issued a £100 million secured note programme which launched on 17 January

2019. The stated aim of the programme was to facilitate secured lending,

primarily in the innovation and technology sector. The purpose of the ICFL Bond

was to connect investors seeking high, fixed income yields with capital security,

and borrowers seeking capital injections at competitive rates to grow their

business.

4.24.
As at 1 July 2019, SVS had invested £10 million in the ICFL Bond in the Model

Portfolios, in return for commission of 10% of customer funds invested. The bond

was issued for a fixed term until 30 January 2024 with a fixed 6.25% coupon. As

at 1 July 2019, there were £9,802,834 of Model Portfolio customer funds invested

in the ICFL Bond, which represented 12.3% of the total funds in the Model

Portfolios. ICFL Bonds comprised 23.09% of all the fixed income investments in

the Model Portfolios.

4.25.
SVS invested just over £3 million in Angelfish preference shares within the Model

Portfolios. Angelfish’s investment strategy was focused on businesses and

companies in the technology sectors, and the stated purpose of the preference

share issue was to progress development activities and provide capital for further

investment opportunities as they arose. The preference shares were listed on the

NEX Exchange Growth Market in the UK. As at 11 May 2016, SVS invested into

the Angelfish preference shares. Subsequently SVS purchased a further tranche

of preference shares in October 2018. A commission was paid to SVS of 9-10%

on the October 2018 Model Portfolios’ take up of preference shares issued by

Angelfish. There was no historic trading activity in the Angelfish preference shares

before SVS invested. As at 1 July 2019, SVS had £3,065,447 of Model Portfolio

customer funds invested into the Angelfish Preference Shares, which represented

3.65% of the total funds in the Model Portfolios.

4.26.
The Angelfish preference shares offered dividends at 7.1% per annum. Angelfish

has defaulted on dividend payments and no payment has been received by

customers since 30 June 2019. The Angelfish preference shares were converted

to ordinary shares in September 2020.

The Customer Journey

4.27.
SVS operated a business model that relied upon financial incentives to market its

discretionary managed Model Portfolios to retail customers. SVS then used those

customer funds for its own benefit by exercising its discretion to prefer fixed

income investments which paid SVS itself substantial commission, calculated as a

percentage of the customer funds that SVS steered into those investments.

4.28.
SVS entered into marketing agreements with unauthorised introducer firms and

individuals. The role of the introducer was to “generate certain customer lead

types … with a view to generating income” for SVS. SVS incentivised its

introducers to attract customers funds into the Model Portfolios by paying them

commission calculated as a percentage of the net sum invested with SVS. This

incentive commission varied between 7% and 9% of customer funds invested,

depending on the introducer.

4.29.
Mr Stephen was aware of the potential risks of this business model as, on 4 August

2016, he emailed an Authority alert to the directors of SVS which highlighted the

responsibilities of authorised firms when accepting business from unauthorised

introducers, particularly where the introducer influences the final investment

choice.

4.30.
The introducer firms did not introduce customers directly to SVS; they introduced

prospective customers to financial advisers on the premise that they would

recommend the Model Portfolios to customers where it was suitable to do so.

4.31.
The unauthorised introducers introduced customers to financial advisers

employed by various regulated financial advice firms; prospective customers were

introduced for a pension review.

4.32.
SVS had written Introducing Broker Partnership Agreements with the financial

advice firms. The terms of the Introducing Broker Partnership Agreements

included that the financial advisers would only introduce customers to SVS for

whom the services could reasonably be expected to be suitable.

SIPP Trustees

4.33.
For those customers that were advised to invest in the Model Portfolios, SIPP

Trustees would enter into an arrangement with the customer to maintain a SIPP

and to hold its assets. The SIPP Trustees were clients of SVS and established,

operated and administered the SIPPs.

4.34.
The financial advisers were responsible for contacting the SIPP Trustees on behalf

of the customer.

SVS (Discretionary Fund Manager)

4.35.
SVS categorised the Model Portfolio customers as retail customers. SVS made

discretionary decisions on which assets to include in the Model Portfolios. Each of

the Model Portfolios held the same assets but in different proportions. Customers

were not asked for permission before investing, but they and their financial

advisers would receive statements on a periodic basis detailing the investments.

Decision to introduce a mark-down on fixed income disinvestments

4.36.
The Authority requires firms to pay due regard to the interests of their customers

and treat them fairly. This obligation was acknowledged in SVS’s Order Execution

Policy.

Decision to introduce a 10% mark-down

4.37.
In November 2018, the Board of Directors decided to introduce a 10% mark-down

on the valuation of the fixed income assets when a customer disinvested from the

Model
Portfolios. The
rationale
provided
in
contemporaneous
internal

documentation for taking a 10% mark-down was to earn additional income for

SVS.

4.38.
This decision was made by the SVS Board of Directors supported by Mr Stephen.

In actively supporting the decision and implementing it whilst dismissing the

internal concerns about its fairness which were raised by SVS staff, Mr Stephen

failed to prevent SVS from treating customers unfairly. Moreover, the application

of a 10% mark-down was not notified to customers. This meant that customers

did not have the opportunity to consider the potential impact of the mark-down

when deciding whether to disinvest. If customers knew about this charge, they

may have decided to disinvest before it came into effect or not to disinvest after

it had, both of which would have led to less income for SVS. As such, Mr Stephen

played an important role in an arrangement that he knew was designed to

generate revenue for SVS to the detriment of its customers.

Failure to communicate the 10% mark-down to customers

4.39.
Prior to November 2018, SVS did not charge customers when they disinvested

from the Model Portfolios.

4.40.
From November 2018, SVS applied a 10% mark-down on all fixed income

disinvestments. This mark-down was applied to all customers who disinvested

regardless of the length of time they had held their investment. This was contrary

to the statement in the Model Portfolio brochure provided to customers (which Mr

Stephen, as Head of Compliance, was responsible for), that exit charges to

customers who disinvested would differ based on the length of time a customer

had been invested.

4.41.
In breach of COBS 11.2A.31R, SVS did not communicate the 10% mark-down to

customers in a clear manner and did not disclose anything in writing to customers,

their SIPP Trustees or financial advisers for a further six months, namely on 30

May 2019. The written disclosure that was eventually made only referred to “the

wider spread”; it did not include any reference to the fixed 10% mark-down, but

referred instead to a “spread”, at Mr Stephen’s suggestion.
The Authority

considers the reference to the mark-down as a spread by Mr Stephen to be

misleading as the reference to the fixed 10% mark-down was not referable to

specific bid/offer prices in the market but was instead applied as 10% to all

disinvestments that took place from November 2018. In addition to this,

contemporaneous correspondence (copied to Mr Stephen) demonstrates that the

Model Portfolio Team understood the mark-down to operate as a fixed charge.

Internal concerns regarding the introduction of the 10% mark-down

4.42.
Staff within SVS raised concerns that, amongst other things, the decision to

introduce a 10% mark-down was not fair to customers and would lead to

complaints. Despite these concerns being raised with Mr Stephen and the SVS

Board of Directors a number of times, they were unreasonably disregarded by Mr

Stephen and he continued to support the 10% mark-down and as a result failed

to prevent SVS from treating customers unfairly.

4.43.
Concerns were raised to Mr Stephen and directors in relation to the introduction

of the 10% mark-down, and/or the operation of the process behind the 10%

mark-down, on the following occasions:

1)
2 November 2018 – concerns were raised about SVS profiting unduly from

a disinvestment mark-down which was higher than the proposed exit

charge;

2)
19 November 2018 - concerns were raised about not having a “fully formed

procedure”;

3)
22 November 2018 - concerns were raised that the introduction of the 10%

mark-down was not “a workable solution”;

4)
26 November 2018 – staff within SVS questioned the justification for

applying a 10% mark-down;

5)
11 December 2018 - concerns were raised that SVS was double counting

costs charged to customers;

6)
14 December 2018 – concerns were raised that the 10% mark-down “looks

like a fee coming straight out of the models”;

7)
17 December 2018 – concerns were raised that the situation was

unworkable and SVS was unable to provide an explanation to customers

that could be defended;

8)
4 February 2019 – concerns were raised that the disinvestment process was

not fair on customers; and

9)
13 February 2019 – concerns were raised that the new disinvestment policy

was “not an efficient way to carry out the disinvestments when compared to

the application of exit charges as a percentage that reduces with each year

of participation.”

4.44.
Mr Stephen did not consider the concerns raised to be valid. Mr Stephen suggested

that the mark-down could be explained as falling within the best execution rules,

although concerns had been raised to him about that. In supporting the 10%

mark-down and dismissing the concerns raised about it, Mr Stephen failed to

prevent SVS from treating customers unfairly by applying a fixed charge to all

disinvestments which was not notified to customers. This meant that customers

did not have the opportunity to consider the potential impact of the mark-down

when deciding whether and when to disinvest.

4.45.
Mr Stephen sent internal SVS emails in November and December 2018 referring

to the concerns raised as “ridiculous” and reiterated that the decision to

implement the 10% mark-down had been made and he had approved it. For

example, Mr Stephen stated in an email in November 2018 “As far as I’m

concerned the main reason for the delays have been the [Model Portfolio Team’s]

continual procrastination over the disinvest process despite this being agreed both

by email and at meetings on a number of occasions. As you can see below [Model

Portfolio Team member] is again questioning what the process is ... it’s

ridiculous!!”. Mr Stephen dismissed the concerns raised within SVS about the

10% mark-down without giving appropriate consideration to the issues raised.

Financial consequences for customers due to the introduction of the 10% mark-

down

4.46.
SVS prioritised its profits at the expense of customers by introducing a 10% mark-

down on the value of fixed income disinvestments. After the decision was made

to introduce the 10% mark-down, customers disinvested £5,784,000 between

October 2018 and August 2019. From these disinvestments, SVS earned

£359,800 in income as customers were charged a higher amount than the cost to

SVS. This income would have increased had SVS not entered administration on 5

August 2019.

4.47.
The table below sets out the consequences of the introduction of the 10% mark-

down for three customers:

Amount invested
£92,890.92
£266,204.76
£20,296.10

Date of investment
16 June 2017
1 November

Date disinvestment
actioned

Value of investments
at date of
disinvestment (A)

£75,575.54
£223,575.15
£19,880.64

Amount returned to
customer (B)

£71,132.62
£210,431.09
£18,645.93

Amount returned to
customer (%)

(B / A)

Value of fixed income
assets disinvested (C)

£35,904.41
£106,214.79
£7,029.93

Amount of fixed
income assets
returned to customer
(D)

£32,314.01
£95,593.33
£6,326.97

Fixed income
disinvestment mark-
down (C – D)

£3,590.40
£10,621.46
£702.96

Fixed income
disinvestment mark-
down (%)

(D / C)

Fixed income
disinvestment as % of
total investment

(C-D / A)

5%
5%
4%

4.48.
Customer 94008 was 60 years old when they invested, was a carer to their elderly

parent, owned a property worth £70,000, had an annual income of £4,700, and

had other investments of £7,000. The Authority considers that the fixed income

disinvestment mark-down of £3,590.40 taken by SVS was a significant amount to

the customer.

4.49.
Customer 84848 planned to retire in 10 years, was a personal assistant earning

around £31,000 a year, owned a property worth £185,000, and had other savings

and investments of £2,100. The Authority considers that the fixed income

disinvestment mark-down of £10,621.46 taken by SVS was a significant amount

to the customer. Customer 84848 submitted a complaint to SVS due to the

performance of the Model Portfolios, the customer statements being unclear, and

unsatisfactory service received from SVS. In the complaint, Customer 84848

explicitly asked whether exit charges were applied, to understand why the value

of the customer’s investment had decreased. The response to the complaint,

signed by or on behalf of Mr Stephen, claimed that the Firm did not apply exit

charges and instead the reduction in value was due to the “wider spread” on fixed

income products when sold “into the market”. This misrepresented the situation

to the customer as a flat 10% had been applied to the disinvestment, which

operated as charge.
In reviewing the complaint, SVS considered that

compensation may be appropriate for the unsatisfactory service provided but it

does not appear that the firm considered the amount that the customer lost due

to the disinvestment mark-down applied.

4.50.
Customer 124128, and their partner, invested all of their pension funds of

£20,296 into the Model Portfolio and had no other savings or investments. The

customer planned to retire within 10 years, was a road maintenance worker

earning £30,000 a year, and jointly owned a property worth £500,000. The

customer was only invested in the Model Portfolios for 3 weeks and lost £702.96

due to the disinvestment mark-down, which the Authority considers to be a

significant amount to the customer.

4.51.
The decision to introduce a 10% mark-down on all fixed income disinvestments

was strongly supported by Mr Stephen and was not made with the best interests

of customers in mind. In particular, the decision was made to generate revenue

for SVS at a time when the firm had financial concerns, and it unduly prioritised

the interests of the firm over the interests of customers.

4.52.
Furthermore, SVS did not inform customers in writing of the change until six

months after the change had been made, and the disclosure did not specify that

SVS was taking a 10% mark-down. Concerns about the process were raised by

the Model Portfolio Team but were not handled appropriately by Mr Stephen who

unreasonably dismissed the concerns rather than addressing the fairness issues

which had been raised.

4.53.
The Authority considers that Mr Stephen actively supported the decision to apply

a 10% mark-down at the expense of retail pension customers; he did not deal

with the concerns raised in an appropriate manner; and he did not take reasonable

steps to ensure that the decision was communicated to customers or their

financial advisers in a durable format.

High level of fees and commission received by SVS

4.54.
SVS received high levels of commission from the Model Portfolio fixed income

product providers. COBS 2.3A.15R came into force on 3 January 2018, in line with

MiFID II, relates to the payment of inducements including commission. It states

that a firm must not accept any commission from any third party in provision of

a relevant service to retail clients. However, throughout the Relevant Period, SVS

was paid commission from product providers calculated as a percentage of the

customer funds SVS directed to that product. This incentivised SVS to maximise

the investment of customer funds into these products. Mr Stephen should have

ensured that SVS did not accept such payments. These inducements put at risk

SVS's independence and compromised its ability to act in the best interests of its

customers.

4.55.
When SVS placed customer funds into the Fixed Income investments, it received

the following commission:

1)
in relation to investments in CFBL, SVS received 10% commission from CFBL

and 2% from Specialist Advisors. This investment totalled £23,436,165, or

54.41% of the Fixed Income investments;

2)
in relation to investments in the Ingard Property Bonds, SVS received 10%

commission from Ingard Alternative Funding and 2% from Ingard Financial.

This investment totalled £5,700,000, or 13.23% of the Fixed Income

investments;

3)
in relation to investments in ICFL, SVS received 10% commission. SVS drew

down £750,000 of the £1 million commission upfront due to liquidity and

cashflow issues. This investment totalled £9,802,834, or 22.76% of the

Fixed Income investments;

4)
in relation to an investment in Angelfish preference shares in October 2018,

SVS received 9%-10% commission. This investment totalled £3,065,447, or

7.12% of the Fixed Income investments; and

5)
in relation to investments in Queros, SVS did not receive any commission.

This investment totalled £1,067,093 or 2.48% of the Fixed Income

Investments.

4.56.
The amounts invested by SVS in the fixed income investments corresponded with

the amount of commission generated. The largest fixed income investments in

the Model Portfolios were the CFBL Bonds, for which SVS received the greatest

amount of commission. The smallest fixed income investment in the Model

Portfolios was Queros, for which SVS received no commission.

4.57.
The additional 2% paid to SVS on investments in CFBL and the Ingard Property

Bonds was also determined by reference to the amount of customer funds

invested by SVS in the relevant product.

4.58.
The commission paid to SVS by the fixed income product providers was used to

pay the marketing fees to the introducer firms to incentivise them to steer new

customers into the Model Portfolios.

4.59.
The commission payments expressed as a percentage of the customer funds

invested into the product, together with the trigger for payment (channelling

investor funds into bond products) that arose after 3 January 2018 were

accordingly in breach of COBS 2.3A.15R. The Authority has found no evidence to

indicate that the commission payments SVS received were necessary for the

services it provided.

4.60.
Mr Stephen was aware of the commission paid by the fixed income product

providers to SVS and provided this information to the Authority in response to an

information requirement dated 11 May 2017. As the holder of the firm’s CF10

(Compliance Oversight) function, the Authority considers that Mr Stephen should

have ensured that the firm fully considered the implications of COBS 2.3A.15R

following its introduction so as to remain compliant after 3 January 2018 with the

Authority’s rules in relation to inducements.

4.61.
SVS charged commission of 1.5% on all transactions, which was reduced to

0.75% in April 2019. Taking into account the IFA advice fee of up to 4% of the

customer’s investment, this meant that Model Portfolio customers lost up to 5.5%

of their investment at the outset. As SVS also took up to 10% of its customer’s

funds for commission in respect of fixed income products, this increased the risk

of product default, so the likelihood that Model Portfolio customers would get back

what they paid in was reduced further.

Notifying customers about the risk of the Model Portfolios

Risk of the Model Portfolios

4.62.
Section 3.3.1R of PROD which came into force on 3 January 2018, states that a

distributor must: understand the financial instruments it distributes to clients;

assess the compatibility of the financial instruments with the needs of the clients

to whom it distributes investment services, taking into account the manufacturer’s

identified target market of end clients; and ensure that financial instruments are

distributed only when this is in the best interests of the client. SVS was a

distributor for purposes of the PROD rules.

4.63.
SVS considered the Model Portfolios to be high risk products. It was SVS’s

responsibility to ensure that the customer understood the risk of the investment.

Approximately 90% of SVS’s Model Portfolio customers received pension switching

or pension transfer advice. Despite this, SVS did not take sufficient steps to

identify groups of end customers for whose needs, characteristics and objectives

the Model Portfolio was not compatible. This is despite the provisions of PROD

3.3.15R(3) which require such steps to be taken. SVS instead relied on the

assessments carried out by each end customer’s financial adviser.

4.64.
SVS was provided with the financial advisers’ suitability letters for customers.

These letters disclosed customers’ attitudes to risk and included customers whose

attitudes to risk were not classed as high (such as lowest medium risk or high

medium risk). As the Model Portfolios were considered to be high risk, these

customers had invested in products with a higher level of risk than they may have

been willing or able to bear. Mr Stephen was aware of this. While SVS carried out

appropriateness checks on new customers, these were limited and lacked

adequate independent assessment, relying instead on the suitability advice that

was given to customers by financial advisers. As a result, SVS Compliance, led

by Mr Stephen, allowed large numbers of retail pension customers to invest their

savings into the high-risk Model Portfolios.

4.65.
Mr Stephen did not address the risk to customers from SVS failing in its obligation

to act in its customers’ best interests and to carry out adequate assessment that

would identify and exclude customers for whose needs the Model Portfolios were

not suitable; Mr Stephen knew that SVS continued to accept customers even

though the Model Portfolios had a higher level of risk than these customers were

willing or able to bear.

5.
FAILINGS

5.1.
The statutory and regulatory provisions relevant to this Notice are referred to in

5.2.
Based on the facts and matters described above, and for the reasons set out

below, the Authority considers that during the Relevant Period Mr Stephen

breached Statement of Principle 1 and Statement of Principle 6.

Breach of Statement of Principle 1

5.3.
Mr Stephen breached Statement of Principle 1 during the Relevant Period because

he failed to act with integrity in carrying out his accountable functions.

5.4.
Mr Stephen’s actions, in actively supporting the decision to introduce a 10% mark-

down to the valuation of fixed income disinvestments, led to SVS’s customers not

being treated fairly and suffering detriment:

1) Multiple concerns were raised to Mr Stephen by the Model Portfolio Team over

the course of action relating to the mark-down as not being fair to customers,

yet he chose to dismiss these, rather than addressing the fairness issues which

had been raised;

2) Mr Stephen was aware that the purpose of the mark-down was to generate

more income for SVS, at a time when it had financial concerns, at the expense

of retail pension customers. SVS earned £359,800 in income at the expense

of its customers. He supported the arrangement despite the concerns raised

by the Model Portfolio Team; and

3) Mr Stephen failed to take steps to ensure that the change was adequately

communicated to customers or their financial advisers. As a consequence,

from the time their disinvestment decision was taken, customers were

detrimentally affected as they did not have the opportunity to consider the

potential impact of the mark-down when deciding to disinvest. In particular,

when a disclosure was eventually made to customers, some six months later,

as Mr Stephen well knew, it did not specify the 10% mark-down.

5.5.
As a result of the above failings, during the Relevant Period, Mr Stephen failed to

act with integrity in carrying out his accountable functions. He was reckless as to

the risk to customers from the 10% mark-down, with the result that his actions

directly led to SVS customers being adversely impacted whilst SVS benefitted

financially.

5.6.
Mr Stephen breached Statement of Principle 6 during the Relevant Period because

he failed to exercise due skill, care and diligence in managing the business of SVS.

1)
was aware that financial advisers advised lowest medium and high medium

risk customers to invest in the Model Portfolios which were high risk

products. However, contrary to the Authority’s rules after 3 January 2018,

he failed to take reasonable steps to address the risk this created for

customers:
instead
of
ensuring
that
SVS
properly
assessed
for

appropriateness by determining the needs, characteristics and objectives of

the Model Portfolio customers, Mr Stephen relied on financial advisers to do

this. As a result of this failure, SVS continued to accept customers from

financial advisers even though the Model Portfolios had a higher level of risk

than these customers were willing or able to bear; and

2)
was aware of the amount of commission received by SVS from the fixed

income product providers, an inducement which was contrary to the

Authority’s rules after 3 January 2018, put at risk SVS's independence and

compromised its ability to act in the best interests of its customers. Mr

Stephen therefore failed to take reasonable steps to ensure that the firm

complied with the Authority’s rules in relation to inducements.

5.7.
As a result of the above failings, during the Relevant Period, Mr Stephen failed to

exercise due skill, care and diligence in managing the business of SVS, with the

result that SVS’s customers were adversely impacted whilst SVS benefitted

financially.

Fit and Proper test for Approved Persons

5.8.
The Authority and consumers rely on senior management function holders to

ensure that authorised firms are properly managed and comply with the

requirements of the regulatory regime. Mr Stephen’s failings were not confined

to just one part of SVS’s business but occurred in a range of areas for which, as

CF10, he held specific responsibilities: Mr Stephen failed to prevent SVS treating

customers unfairly with the introduction of the disinvestment mark-down—with

the result that customers disinvesting from the Model Portfolio suffered financial

detriment; and failed to ensure that SVS complied with rules governing the

payment of inducements.

5.9.
By reason of the facts and matters described above, the Authority considers that

Mr Stephen’s conduct demonstrates a serious lack of integrity, and competence

and capability, such that he is not a fit and proper person to perform any senior

management function or significant influence function in relation to regulated

activities carried on at any authorised person, exempt person or exempt

professional firm.

6.
SANCTION

Financial penalty

6.1.
The Authority’s policy for imposing a financial penalty is set out in Chapter 6 of

DEPP. The Authority applies a five-step framework to determine the appropriate

level of financial penalty. DEPP 6.5B sets out the details of the five-step

framework that applies in respect of financial penalties imposed on individuals in

non-market abuse cases.

Step 1: disgorgement

6.2.
Pursuant to DEPP 6.5B.1G, at Step 1 the Authority seeks to deprive an individual

of the financial benefit derived directly from the breach where it is practicable to

quantify this.

6.3.
The Authority has not identified any financial benefit that Mr Stephen derived

directly from the breach.

6.4.
Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.5.
Pursuant to DEPP 6.5B.2G, at Step 2 the Authority determines a figure that

reflects the seriousness of the breach. That figure is based on a percentage of

the individual’s relevant income. The individual’s relevant income is the gross

amount of all benefits received by the individual from the employment in

connection with which the breach occurred, and for the period of the breach.

6.6.
The period of Mr Stephen’s breaches of Statements of Principle 1 and 6 was from

3 January 2018 to 2 August 2019. The Authority considers Mr Stephen’s relevant

income for this period to be £173,781.

6.7.
In deciding on the percentage of the relevant income that forms the basis of the

Step 2 figure, the Authority considers the seriousness of the breach and chooses

a percentage between 0% and 40%. This range is divided into five fixed levels

which represent, on a sliding scale, the seriousness of the breach; the more

serious the breach, the higher the level. For penalties imposed on individuals in

non-market abuse cases there are the following five levels:

Level 1 – 0%

Level 2 – 10%

Level 3 – 20%

Level 4 – 30%

Level 5 – 40%

6.8.
In assessing the seriousness level, the Authority takes into account various factors

which reflect the impact and nature of the breach, and whether it was committed

deliberately or recklessly.

6.9.
DEPP 6.5B.2G(12) lists factors likely to be considered ‘level 4 or 5 factors’. Of

these, the Authority considers the following factors to be relevant:

1)
the breaches caused a significant loss to individual consumers (DEPP

6.5B.2G (12)(a));

2)
Mr Stephen failed to act with integrity (DEPP 6.5B.2G(12)(d));

3)
as an experienced individual in a senior management position, Mr Stephen

abused a position of trust, and failed to put the customer at the heart of the

decisions made, thus causing risk of loss to a large number of consumers

(DEPP 6.5B.2G (12)(e)); and

4)
the breach described in paragraphs 5.3 to 5.5 was committed recklessly

(DEPP 6.5B.2G (12)(g)).

6.10.
DEPP 6.5B.2G(13) lists factors likely to be considered ‘level 1 or 2 or 3’ factors.

Of these, the Authority considers the following factor to be relevant:

1)
some of Mr Stephen’s breaches were committed negligently.

6.11.
Taking all of these factors into account, the Authority considers the seriousness

of the breaches to be level 4 and so the Step 2 figure is 30% of £173,781.

6.12.
Step 2 is therefore £52,134.

Step 3: mitigating and aggravating factors

6.13.
Pursuant to DEPP 6.5B.3G, at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2, but not including any

amount to be disgorged as set out in Step 1, to take into account factors which

aggravate or mitigate the breach.

6.14.
The Authority has considered whether any of the mitigating or aggravating factors

listed in DEPP 6.5B.3G, or any other such factors, apply in this case and has

concluded that none applies to a material extent, such that the penalty ought to

be increased or decreased.

6.15.
Step 3 is therefore £52,134.

Step 4: adjustment for deterrence

6.16.
Pursuant to DEPP 6.5B.4G, if the Authority considers the figure arrived at after

Step 3 is insufficient to deter the individual who committed the breach, or others,

from committing further or similar breaches, then the Authority may increase the

penalty.

6.17.
The Authority considers that the Step 3 figure of £52,134 represents a sufficient

deterrent to Mr Stephen, and so has not increased the penalty at Step 4.

6.18.
Step 4 is therefore £52,134.

Step 5: settlement discount

6.19.
The Authority and Mr Stephen have not reached an agreement to settle and so no

discount applies to the Step 4 figure. Pursuant to DEPP 6.5B.5G, if the Authority

and the individual on whom a penalty is to be imposed agree the amount of the

financial penalty and other terms, DEPP 6.7 provides that the amount of the

financial penalty which might otherwise have been payable will be reduced to

reflect the stage at which the Authority and the individual reached agreement.

The settlement discount does not apply to the disgorgement of any benefit

calculated at Step 1.

6.20.
Step 5 is therefore £52,100 (rounded down to the nearest £100).

6.21.
The Authority has therefore decided to impose a total financial penalty of £52,100

on Mr Stephen for breaching Statements of Principle 1 and 6.

6.22.
The Authority has the power to prohibit individuals under section 56 of the Act.

The Authority has had regard to the guidance in Chapter 9 of the Enforcement

Guide in considering whether Mr Stephen should be prohibited and the nature of

any such prohibition. The relevant provisions of the Enforcement Guide are set

out in Annex A to this Notice. In particular, the Authority has been mindful of the

a. whether the individual is fit and proper to perform functions in related to

regulated activities;

b. whether, and to what extent, the approved person has failed to comply

with the Statements of Principle issued by the Authority with respect to

the conduct of approved persons;

c. the relevance and materiality of any matters indicating unfitness;

d. the particular controlled function the approved person was performing, the

nature and activities of the firm concerned and the markets in which he

operates; and

e. the severity of the risk which the individual poses to consumers and to

confidence in the financial system.

6.23.
Given the nature and seriousness of the failures set out above, Mr Stephen’s

conduct demonstrated a lack of integrity and competence such that he is not a fit

and proper person to perform any senior management function and any significant

influence function in relation to any regulated activities carried on by any

authorised or exempt person, or exempt professional firm. The Authority

considers that, in the interests of consumer protection, and in order to maintain

market confidence, it is appropriate and proportionate in all the circumstances to

impose on Mr Stephen the Prohibition Order in the terms set out above.

7.
REPRESENTATIONS

7.1
Annex B contains a brief summary of the key representations made by Mr Stephen

in response to the Warning Notice and how they have been dealt with. In making

the decision which gave rise to the obligation to give this Notice, the Authority

has taken into account all of the representations that it received on the Warning

Notice, whether or not set out in Annex B.

8.
PROCEDURAL MATTERS

8.1.
This Notice is given to Mr Stephen under sections 57 and 67 of the Act and in

accordance with section 388 of the Act.

8.2.
The following statutory rights are important.

Decision maker

8.3.
The decision which gave rise to the obligation to give this Notice was made by the

RDC. The RDC is a committee of the Authority which takes certain decisions on

behalf of the Authority. The members of the RDC are separate to the Authority

staff involved in conducting investigations and recommending action against firms

and individuals. Further information about the RDC can be found on the

Authority’s website:

The Tribunal

8.4.
Mr Stephen has the right to refer the matter to which this Notice relates to the

Tribunal. Under paragraph 2(2) of Schedule 3 of the Tribunal Procedure (Upper

Tribunal) Rules 2008, Mr Stephen has 28 days from the date on which this Notice

is given to him to refer the matter to the Tribunal. A reference to the Tribunal is

made by way of a signed reference notice (Form FTC3) filed with a copy of this

Notice. The Tribunal’s contact details are: Upper Tribunal, Tax and Chancery

9730; email: fs@hmcts.gsi.gov.uk).

8.5.
Further information on the Tribunal, including guidance and the relevant forms to

complete, can be found on the HM Courts and Tribunal Service website:

8.6.
A copy of Form FTC3 must also be sent to the Authority at the same time as filing

a reference with the Tribunal. A copy should be sent to Mark Lewis at the Financial

Conduct Authority, 12 Endeavour Square, London E20 1JN.

8.7.
Once any such referral is determined by the Tribunal and subject to that

determination, or if the matter has not been referred to the Tribunal, the Authority

will issue a final notice about the implementation of that decision.

Access to evidence

8.8.
Section 394 of the Act applies to this Notice.

8.9.
The person to whom this Notice is given has the right to access:

(1)
the material upon which the Authority has relied in deciding to give this

Notice; and

(2)
the secondary material which, in the opinion of the Authority, might

undermine that decision.

Third party rights

8.10.
A copy of this Notice is being given to Stuart Anderson as a third party identified

in the reasons above and to whom in the opinion of the Authority the matter to

which those reasons relate is prejudicial. Mr Anderson has similar rights to those

mentioned in paragraphs 8.4 and 8.9 above, in relation to the matter which

identifies him.

Confidentiality and publicity

8.11.
This Notice may contain confidential information and should not be disclosed to a

third party (except for the purpose of obtaining advice on its contents). In

accordance with section 391 of the Act, a person to whom this Notice is given or

copied may not publish the Notice or any details concerning it unless the Authority

has published the Notice or those details.

8.12.
However, the Authority must publish such information about the matter to which

a Decision Notice or Final Notice relates as it considers appropriate. The persons

to whom this Notice is given or copied should therefore be aware that the facts

and matters contained in this Notice may be made public.

30

Authority contacts

8.13.
For more information concerning this matter generally, contact Mark Lewis at the

Authority (direct line: 020 7066 8442 / email: mark.lewis2@fca.org.uk).

Tim Parkes
Chairman, Regulatory Decisions Committee

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1.
RELEVANT STATUTORY PROVISIONS

1.1.
The Authority’s statutory objectives, set out in section 1B(3) of the Act, include

the operational objective of securing an appropriate degree of protection for

consumers (section 1C).

1.2.
Section 66 of the Act provides that the Authority may take action against a person

if it appears to the Authority that he is guilty of misconduct and the Authority is

satisfied that it is appropriate in all the circumstances to take action against him.

A person is guilty of misconduct if, while an approved person, he has failed to

comply with a statement of principle issued under section 64A of the Act, or has

been knowingly concerned in a contravention by a relevant authorised person of

a relevant requirement imposed on that authorised person.

1.3.
Section 56 of the Act provides that the Authority may make an order prohibiting

an individual from performing a specified function, any function falling within a

specified description or any function, if it appears to the Authority that that

individual is not a fit and proper person to perform functions in relation to a

regulated activity carried on by an authorised person, exempt person or a person

to whom, as a result of Part 20, the general prohibition does not apply in relation

to that activity. Such an order may relate to a specified regulated activity, any

regulated activity falling within a specified description, or all regulated activities.

2.
RELEVANT REGULATORY PROVISIONS

Statements of Principle and Code of Practice for Approval Persons

2.1.
The Authority’s Statements of Principle and Code of Practice for Approved Persons

(“APER”) have been issued under section 64A of the Act.

2.2.
During the Relevant Period, Statement of Principle 1 stated:

“An approved person must act with integrity in carrying out his accountable

functions.”

2.3.
During the Relevant Period, Statement of Principle 6 stated:

“An approved person performing an accountable higher management function

must exercise due skill, care and diligence in managing the business of the firm

for which they are responsible in their accountable function.”

2.4.
‘Accountable functions’ include controlled functions and any other functions

performed by an approved person in relation to the carrying on of a regulated

activity by the authorised person to which the approval relates.

2.5.
APER sets out descriptions of conduct which, in the opinion of the Authority, does

not comply with a Statement of Principle. It also sets out factors which, in the

Authority’s opinion, are to be taken into account in determining whether an

approved person’s conduct complies with a Statement of Principle.

The Fit and Proper Test for Approved Persons

2.6.
The part of the Authority’s Handbook entitled “The Fit and Proper Test for

Approved Persons” (“FIT”) sets out the criteria that the Authority will consider

when assessing the fitness and propriety of a candidate for a controlled function.

FIT is also relevant in assessing the continuing fitness and propriety of an

approved person.

2.7.
FIT 1.3.1G states that the Authority will have regard to a number of factors when

assessing the fitness and propriety of a person. The most important considerations

will be the person’s honesty, integrity and reputation, competence and capability

and financial soundness.

The Authority’s policy for exercising its power to make a prohibition order

2.8.
The Authority’s policy in relation to prohibition orders is set out in Chapter 9 of

the Enforcement Guide (“EG”).

2.9.
EG 9.1 states that the Authority may exercise this power where it considers that,

to achieve any of its regulatory objectives, it is appropriate either to prevent an

individual from performing any functions in relation to regulated activities or to

restrict the functions which he may perform.

Conduct of Business Sourcebook

2.10.
The Authority’s rules and guidance for Conduct of Business are set out in COBS.

The rules in COBS relevant to this Notice are 2.1.1R, 2.3A.15R, 11.2A.2R,

Senior Management Arrangements, Systems and Controls Sourcebook

2.11.
The Authority’s rules and guidance for senior management arrangements,

systems and controls are set out in SYSC. The rules in SYSC relevant to this notice

are 10.1.3R, 10.1.4R, 10.1.6R, 10.1.7R, 10.1.8R.

Product Intervention and Product Governance Sourcebook

2.12.
The Authority’s rules and guidance for Product Intervention and Product

Governance are set out in PROD. The rules and guidance in PROD relevant to this

notice are 3.3.1R, 3.3.3R and 3.3.15R(3).

Decision Procedure and Penalties Manual

2.13.
Chapter 6 of DEPP sets out the Authority’s statement of policy with respect to the

imposition and amount of financial penalties under the Act.

ANNEX B

David Stephen’s Representations

1. A summary of the key representations made by Mr Stephen, and of the Authority’s

conclusions in respect of them (in bold type), is set out below.

The reality of Mr Stephen’s role and responsibilities

2. Much of the misconduct alleged by the Authority arose as a result of: (1) commercial

decisions made by Mr Virk; (2) the secret commission arrangements that Mr Virk
entered into with various third parties; and (3) the close relationship Mr Virk had with
Mr Anderson. Mr Virk benefitted financially from these arrangements/relationships. Mr
Virk concealed from Mr Stephen the fact of the relationships, the commercial
arrangements and the benefits he received, and Mr Stephen was an unknowing
bystander to Mr Virk’s deception. Mr Stephen, as the Compliance Officer, did not, and
was not in a position to, take or influence the commercial decisions made by Mr Virk.
He was not fully sighted on the commercial agreements and the underlying
commercial rationale behind them.

3. Mr Virk made the decisions to enter into the commercial arrangements and it was the

Investment Committee that had the responsibility to make decisions as to what
products to invest in, and to carry out the necessary due diligence. Mr Stephen was
not involved with this process.

4. Mr Stephen was not a director and did not sit on either of the two key internal

committees, namely, the Board of Directors and/or the Investment Committee. He
only attended such meetings at the request of the directors to discuss any Compliance
matters that they made him aware of. As part of Mr Stephen’s role, as Head of
Compliance, from time to time he challenged and pushed back on proposals made by
SVS’s senior management team.

5. The Authority’s expectation of a holder of a CF10 (Compliance Oversight)

function during the Relevant Period was set out in SUP 10A.7.8R 1 (with

reference to SYSC 3.2.8R2), namely as a director or senior manager to have
responsibility for oversight of the firm's compliance and to report to the
governing body in respect of that responsibility.

6. By virtue of SYSC 6.1.2R and 6.1.3R, the compliance function was required to

operate independently and to monitor and, on a regular basis, to assess the
adequacy and effectiveness of the measures and procedures put in place by
a firm to detect any risk of failures by the firm to comply with its obligations
under the regulatory system, and the actions taken to address any
deficiencies in the firm's compliance with its obligations.

7. In the Authority’s view, it was not open to Mr Stephen, as the firm’s CF10

and Head of Compliance, to disregard his responsibility for oversight of the
adequacy and effectiveness of the measures and procedures with respect to

important activities of the firm, namely its discretionary fund management
business, on the basis that this was the responsibility of others.
The

Authority expects a CF10 to be proactive in the fulfilment of their
responsibility.

8. Whether Mr Stephen: (i) knew of Mr Virk’s commercial arrangements; or (ii)

challenged SVS’s senior management team on certain proposals, does not
affect Mr Stephen’s culpability for the particular matters set out in the Notice,
because these are matters which he should have made himself aware of
through diligent enquiry, given the proactivity expected when discharging a
CF10 role.

Decision to introduce a mark-down on fixed income disinvestments

9. As was stated in the Model Portfolio brochures, all investments including fixed income

bonds were subject to a dealing fee when they were bought or sold. It had been open
to SVS to charge such dealing fees on all investment transactions within the Model
Portfolios from the outset of the Model Portfolios in January 2016. Before November
2018, if a client wanted to disinvest, it was always open to SVS to buy the bonds as
principal, or to totally disinvest in the marketplace, or to sell to another buyer on a
matched principal basis. This had been disclosed to clients in the Model Portfolio
brochure and terms and conditions, together with the expectation that the
investments would be held to maturity. The brochure specifically stated “…and if they
are sold before maturity you may receive less back than your original investment…”.

10. However, the SVS Board realised that SVS had inadvertently been buying disinvesting

clients’ investments from them at par (i.e. the same price at which the clients had
bought them). This was never the Board’s intention and had been an oversight. In
October 2018, the disinvestment process was reviewed, and whilst the suggestion of
an exit charge was not adopted, SVS favoured an approach whereby it reverted to
accepted market practice, namely that if clients wanted to disinvest, they would
disinvest at the then market price for the bond and in accordance with the “best
execution” rules. Applicable dealing fees and associated disinvestment spreads were
also applied to all disinvestment requests, whether the underlying investments were
equities or fixed income products.

11. Mr Stephen recalls being told that at around this time Mr Virk spoke to Mr Anderson

and was informed by him that the bonds issued by CFBL would trade in the secondary
market at a discount of 30-50%. Hence, Mr Stephen considered that, in accordance
with the “best execution” rules, SVS could have disinvested the investors at this
secondary market price; however, instead a commercial decision was taken by the
directors, led by Mr Virk, that disinvestment would take place at a cost of 10% to the
client. This figure was therefore not arbitrary, and nor was it a commission - it related
to the “best execution rules” and a desire by SVS to be fair to the disinvesting clients.
Had SVS not offered the 10% market spread, the only market spread available to
these disinvesting clients would have been the 30-50% suggested by Mr Anderson,
resulting in a greater cost to them. The 10% market spread was therefore more
advantageous to clients than disinvesting them at the secondary market price.

12. The reason for introducing the 10% spread was, therefore, to bring an end to the

previous status quo which had been overly generous to investors by virtue of SVS’s
oversight, and had inadvertently continued for some time, whilst striking a fair

36

balance. IFAs/SIPP Trustees were provided with disinvestment spreadsheets which
made it clear that a 10% spread had been applied to fixed income investments. All
disinvestments were carried out in line with the Model Portfolios' Terms and
Conditions, as detailed in the client literature and agreements. The 10% spread simply
brought SVS into line with accepted market practice. SVS did not impose an exit
charge on investors for disinvesting.

13. Mr Stephen considers that the assertion that he “actively supported” the

implementation of the decision, mischaracterises what happened: it was a matter for
the Board of SVS what it wished to do from a commercial perspective. However, it
was
Mr
Stephen’s
role
to
assess
whether
it
was
permissible
from
a

regulatory/compliance perspective. Mr Stephen’s view was that it was permissible and
was in accordance with the “best execution” rules. In so far as Mr Stephen supported
the Board’s decision, he did so from a compliance perspective and did not actively
support the decision or its implementation.

14. Mr Stephen accepts that concerns were expressed about the suggested disinvestment

process, and amongst other things, the rationale for the 10% spread. Mr Stephen’s
view, shared by the Board, was that these concerns were an attempt by certain
employees to re-visit decisions which had already been made by the Board. As the
material facts had not changed, in Mr Stephen’s view there was little point in endlessly
debating the same issue. He did not ignore these internal concerns. No formal
complaints were received by Mr Stephen or SVS about the disinvestment process.

15. Mr Stephen honestly believed that the 10% market spread was in accordance with the

best execution requirements as he understood them at the time. He was not reckless.
He understood that the spread was apparent from the disinvestment spreadsheet
statements sent to the IFAs, SIPP providers and clients by SVS.

16. Mr Stephen did not believe, at the time, that the 10% market spread was intended to

generate more income for SVS. The Model Portfolio business only accounted for 25%
of SVS’s total, regulated business in any event. Although a consequence of the
application of the 10% spread may have been that SVS did obtain additional revenue,
this was not the driver behind adopting it; rather, it was to bring SVS in line with
standard market practice on disinvestments and, in doing so, to achieve a better
outcome for disinvesting clients than they would have otherwise been offered in the
secondary market.

17. In acting as principal to facilitate these disinvestments and to provide liquidity, SVS

bought the fixed income investments onto its principal book. Mr Stephen notes that
there has been no investigation by the Authority, nor is there evidence, as to what
happened to these fixed income investments, once they were bought onto SVS’s
principal book. Instead, there has simply been an assertion by the Authority that SVS
immediately sold them to other SVS Model Portfolio investors at par and took no
market risk in doing so. Mr Stephen notes Mr Virk’s statement to the Authority that
there were some instances, where some of these investments remained on the SVS
principal trading book for up to six months. On that basis, SVS was taking market risk
and tying up its own capital.

18. If SVS’s clients held their interest in the fixed income investments until

maturity, they could have expected to receive back 100% of the price which
they had paid for that interest, unless the bond issuer had become insolvent

in the meantime. Whilst the fixed income investments were being held,
clients were also entitled to their share of the regular coupon payments
which were made by the product issuers. Furthermore, during that period
SVS accounted to clients for the value of the fixed income investments at par
(i.e. 100% their issue price). At some point prior to 2 November 2018, it was
suggested within SVS that clients who sought to disinvest should no longer
receive the full value of the fraction of the fixed interest investments
currently attributed to them. The scheme devised by SVS was for it, as
principal, to acquire such investments from the disinvesting clients at 90%
of their par value and then allocate them to other clients invested in the
Model Portfolios at 100%. The person who conducted the trades in question
for SVS stated to Mr Stephen and others on 5 December 2018 that: “The
models will purchase via CROSS from disinvesting clients at MID [mid-market
price]. The client will be charged the flat 10% thereafter as a contract charge.
This has the net effect of the firm making the 10% cut on price.”

19. The fixed income investments within the Model Portfolios were from different

bond programmes, each of which had different maturity dates and preference
share issues. Accordingly, there was no single maturity date for the Model
Portfolios, at which a disinvestment mark-down could be avoided. Although
investors were informed that the fixed income investments should be held
for five years, they were entitled to realise their investments at any time in
accordance with SVS’s Model Portfolio terms and conditions of business.
Since the majority of the £69.6 million invested in the Model Portfolios
represented money invested on behalf of SVS’s clients for the purpose of
funding their pensions the Authority considers that Mr Virk must have known
that certain of those clients were likely to wish to realise their investments
for retirement, by disinvesting, before some or all of those maturity dates.
This meant that, sooner or later, certain of the investors would incur the 10%
disinvestment mark-down. In practice, the revenue which accrued to SVS
from the 10% mark-down totalled £359,800.

20. Mr Stephen asserts that the only other option available to investors would

have been for the investments to be sold in the secondary market or for SVS
to buy them at around 50-70% of their par value, reflecting what Mr
Anderson had apparently said was the likely secondary market price for
CFBL’s Bonds. However, there is no evidence that Mr Stephen or SVS
conducted any investigation of the secondary market price for the fixed
income investments held in the Model Portfolios; rather, it appears that Mr
Stephen relied on what he understood Mr Anderson had said to Mr Virk.

21. Furthermore, prior to the adoption by SVS of the mark-down, SVS had itself

made a market for the fixed income products by routinely using the Model
Portfolios to purchase them from disinvesting clients at par value (100%).
Accordingly, the Authority considers that Mr Stephen is wrong to suggest that
the only other option available to disinvesting investors would have been a
sale at a discount of about 30-50%; the investments could have been
purchased by SVS’s Model Portfolios at par, as had previously been the case.

22. The Authority has not seen any evidence that SVS was holding the

disinvested investments on its principal book at all, let alone for up to six
months, as asserted by Mr Virk to the Authority, and the evidence referred to

38

in paragraph 17 suggests the contrary. The Authority concludes that in reality
there was no market risk for SVS, and that the Authority considers that the
10% mark-down was not a “best execution” market spread; it simply
constituted a profit for SVS. As such, the disinvestment mark-down scheme
was contrary to investors’ best interests.

23. The Model Portfolio brochures and terms of business allowed principal

trading by SVS but they only referred to SVS ‘selling shares that we own’.
There was no reference to SVS buying fixed income investments from
disinvesting customers at 90% of par value and selling them to the Model
Portfolios at 100%. Clients were, in effect, locked into investments which,
from around November 2018 (but not before) they could not exit without the
fixed interest portion of their investments being marked down by 10%. This
also meant that the valuation reports sent to clients (which continued to
show their fixed income investments at par) represented a higher value for
them than on Mr Stephen’s case the clients could hope to obtain on
disinvestment.

24. Even if clients had been informed of the 10% mark-down before they

disinvested (which they were not), by that stage they had no opportunity to
avoid the mark-down to which they had not agreed. The disclosure of the
mark-down should have been made by SVS in the Model Portfolio brochures
and/or Terms of Business, if it was to be imposed at all.

25. The only evidence of any disclosure of which the Authority is aware is in a

spreadsheet sent to an IFA, not to clients. It did not state that SVS acted as
principal in the disinvestment process and therefore did not disclose SVS’s
role in generating a profit for itself of 10%. Even if disinvestment contract
notes disclosed the figure for the charge (and thus profit) made by SVS, that
disclosure was too late. SVS saw an opportunity to make a profit of 10% from
disinvesting clients without fairly disclosing that profit to them at the
appropriate time, and it took that opportunity with Mr Stephen’s sign-off and
support.

26. Amongst the concerns about this proposal one was raised directly with Mr

Stephen by a senior member of staff (summarised at paragraph 4.43 of this
Notice), who, amongst other things, asked Mr Stephen the question: “should
we really be trying to profit from it [the potential cost of disinvestment] and
on a level which would be much higher than any potential exit charge?”. The
Authority expects any CF10 and Head of Compliance, faced with a senior
member of staff repeatedly raising concerns about fairness to customers, to
take those concerns seriously. Instead, Mr Stephen ignored and dismissed
them.

27. The Authority considers that Mr Stephen acted recklessly in respect of the

concerns raised, including by the senior member of staff concerned, that the
charge was not fair to customers. Mr Stephen was aware of the risk of
unfairness, since it had been raised with him directly. By ignoring and
dismissing those concerns, Mr Stephen exposed SVS’s clients to the risk of
harm.

Acceptance of lower risk customers for the Model Portfolio

28. Mr Stephen considers that SVS was a product manufacturer, not a distributor, within

the meaning of the PROD rules; it set up a portfolio in which investors could invest
through their IFAs, and at no time was there any direct selling by SVS to these IFAs'
clients. However, and in any event, SVS and Mr Stephen took adequate steps to
ensure that it was only investors with a high-risk profile, who invested in the Model
Portfolio.

29. It was not improper for SVS only to carry out an appropriateness assessment; nor

was it wrong for SVS and Mr Stephen to rely on the IFAs to carry out suitability
assessments. Mr Stephen considers that the Authority’s incorrect view is based on the
flawed premise that SVS was a product distributor. SVS was not a product distributor
and therefore not subject to PROD 3.3.15R(3)3 . It was the responsibility of the IFAs
to check the suitability of these investments for their retail clients before advising
them to invest.

30. Mr Stephen reasonably expected the IFAs to carry out their regulatory and legal duties

with due skill and care. The letters sent by IFAs to clients made it clear that the IFAs
understood that they had the responsibility to assess the suitability of the investments
for the client which would cover, amongst other things, how the Model Portfolio would
fit into a client’s overall investment objectives(s), and that as a matter of fact, they
had done so. If IFAs had not executed their duties properly at the time, Mr Stephen
considers that this would not invalidate the reasonableness of SVS’s position at the
time.

31. SVS provided the IFAs with, amongst other things, the following information: (1) a

copy of the Model Portfolio Brochure: this provided an explanation of the Model
Portfolios and expressly identified that the Model Portfolios were ‘high-risk’; and (2)
other documentary material, as appropriate. The IFAs were also aware of the fees
charged by SVS and would conduct their own due diligence on the Model Portfolios
and the assets contained within them. SVS employees would also visit the IFAs and
explain how the Model Portfolios operated, the assets within them, and the fee
structure. Mr Stephen considers that IFAs were aware, or ought reasonably to have
been aware, of how the Model Portfolios operated and the assets within them.

32. In addition to the obligation on the IFAs to carry out suitability assessments, SVS

would itself carry out an appropriateness assessment, verbally over the telephone, to
ensure that, amongst other things, the clients understood the risks involved. SVS
checked the information the IFA had provided to them was accurate. This was to
review the applications from an appropriateness point of view, and to seek to ensure

3 PROD 3.3.15R:
(1) Distributors must have in place adequate product governance arrangements to ensure that: (a) the financial
instruments and investment services they intend to distribute are compatible with the needs, characteristics and
objectives of the identified target market; and (b) the intended distribution strategy is consistent with the
identified target market.
(2) Distributors must appropriately identify and assess the circumstances and needs of the clients they intend to
focus on to ensure that their clients’ interests are not compromised as a result of commercial or funding
pressures.
(3) Distributors must identify any groups of end clients for whose needs, characteristics and objectives the
financial instrument or investment service is not compatible.

that no investment was accepted by SVS from customers for whom the Model
Portfolios had a higher risk than they were willing or able to bear. The Model Portfolio
brochure detailed the respective responsibilities of the IFAs and SVS, when a customer
account was opened.

33. A script of questions was prepared for the SVS employee so that the correct questions

were asked, and on a number of occasions SVS rejected investors on the grounds that
SVS had formed a view that the investor did not properly understand the risks. A
number of complaints were made by investors to the Financial Ombudsman Service,
but all were dismissed and none upheld, thereby demonstrating that SVS had at all
times acted fairly and appropriately with investors.

34. Mr Stephen considers that SVS acted in accordance with its regulatory obligation to

carry out an appropriateness assessment. Mr Stephen took reasonable steps to ensure
that it was only investors with a high-risk profile, who invested in the Model Portfolios.

35. Mr Stephen’s argument, that SVS’s services were that of a product

“manufacturer”, rather than a “distributor”, for the purposes of PROD 3, is
incorrect. A “distributor” is defined in the Glossary to the Handbook, in
relation to PROD 3, as: “a firm which offers, recommends or sells investments
or provides investment services to clients”4 . “Investment service” is defined
as any of a list of services, including “(b) execution of orders on behalf of
clients” and “(d) portfolio management”5 . ‘Portfolio management’ is defined
as “managing portfolios in accordance with mandates given by clients on a
discretionary client-by-client basis where such portfolios include one or more
financial instruments”6. SVS bought investments for each client, in line with
the relevant Model Portfolio. SVS therefore managed investments on behalf
of each investor.

36. Purchases of investments were made on a pooled basis, and SVS would make

large investments on behalf of the Model Portfolios, with each investor
treated as holding their share of the investments. Even though investments
were purchased en bloc, they were attributable to each client (as shown in
the clients’ statements) and were purchased and sold on a client-by-client
basis. The Authority considers that SVS, therefore, provided the investment
service of portfolio management, and fell within the definition of
“distributor”.

37. A “manufacturer” is defined in the Glossary, in relation to PROD 3, as “a firm

which creates, develops, issues, and/or designs investments, including when
advising corporate issuers on the launch of new investments”7 . Clients were
not buying a unit in a SVS Model Portfolio. SVS was not selling a unit in a SVS
Model Portfolio. If SVS had been doing so, then the Authority considers that

6 https://www.handbook.fca.org.uk/handbook/glossary/?starts-with=P

7 https://www.handbook.fca.org.uk/handbook/glossary/?starts-with=M

it would almost certainly have been operating a collective investment
scheme8, a permission that SVS did not have.

38. Accordingly, the Model Portfolios were not themselves an “investment” and

SVS was not a “manufacturer”. It was a “distributor”.

39. The Model Portfolios were high-risk. The majority of the £69.6 million

invested through SVS represented money which was to fund clients’
pensions. Mr Stephen appears to accept that SVS did not, as a matter of
course, seek to ensure that its service was compatible with client’s needs,
characteristics and objectives, beyond the appropriateness assessment that
it undertook. This was a breach of PROD 3.3.15R9 . If it had done so, it would
have ascertained that the high-risk Model Portfolios, and SVS’s discretionary
management service, were not compatible with the risk appetites of many
customers. The lack of proper compliance oversight contributed to retail
clients investing in the products: had proper checks on customers’ risk
appetites been carried out by SVS, the Authority considers that certain of
SVS’s clients would not have invested in the Model Portfolios.

40. The Authority considers that Mr Stephen, as CF10 and the firm’s Head of

Compliance, failed to take reasonable steps to ensure that it was only
investors with a high-risk profile, who invested in the Model Portfolios. As
SVS was a distributor, and therefore PROD 3.3.15R directly applied to it, it
was inappropriate for Mr Stephen to rely on the IFA for compliance with this
rule.

41. SVS did not operate a business model that relied upon financial incentives to market

its discretionary managed Model Portfolios to retail customers. There is nothing wrong,
in principle, with a regulated entity having in place commission arrangements as long
as, amongst other things, any duties to the investor are not compromised. In any
event, the Model Portfolio, being at 25%, was a minor component of SVS’s overall
business.

42. SVS’s receipt of the payments for the provision of corporate services to bond providers

did not constitute inducements. It is not correct to assert that SVS took up to 12% of
its customers’ funds for commission in respect of fixed income products. Customer
funds were not used to pay these corporate consultancy fees that the bond providers
had agreed to pay SVS from their own funds.

43. The level of commissions received by SVS did not represent a level of inducement that

put at risk SVS’s independence and compromised its ability to act in the best interests
of its customers. The governance system within SVS, which Mr Stephen notes has
not been criticised by the Authority, ensured that the decisions as to which assets to
invest in were taken by the Investment Committee, which made its decisions
independently. Mr Stephen was not, in any event, involved in this decision making.

8 Establishing, operating or winding up a collective investment scheme is a specified kind of activity under
Article 51ZE of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

9 ibid

44. Mr Stephen denies that SVS was not compliant with the rules relating to inducements

from 3 January 2018 onwards. Moreover, SVS and Mr Stephen obtained legal advice
from a large City firm of solicitors, and was assured that the commission received by
SVS, and the commission paid to introducers, were compliant with relevant rules. Mr
Stephen considers that he took reasonable steps to ensure SVS remained compliant
after 3 January 2018, the date when COBS 2.3A.15R came into force, by seeking legal
advice on the issue.

45. SVS invested its clients’ funds into fixed income investments in respect of

which SVS received large commissions. SVS then paid commissions of 7% to
9% to unauthorised introducers, some of which were owned by the same
individual as the IFA advising SVS’s clients. The risk of an introducer’s
interests affecting the independence of the IFA’s advice is obvious. This was
the message of the Authority’s guidance in August 2016, which included the
warning that: “Many authorised firms receive customer introductions from
introducers. We are very concerned at the increase we have seen in cases in
which the introducer has an inappropriate influence on how the authorised
firm carries out its business, in particular where the introducer influences the
final investment choice”10 .

46. The Authority considers that the clear purpose of the marketing agreements

(referred to in paragraph 4.28 of the Notice) was that introducers would only
receive commission, if clients invested through the Model Portfolios. SVS
ought to have been concerned about the commissions influencing advice
from the IFAs, and whether their duties to SVS’s clients were compromised.

47. Mr Stephen was aware of the commission-driven commercial arrangements

with the fixed income investment providers, as well as the payments to
unauthorised introducers. Indeed, he specifically highlighted to other
directors the Authority’s concerns about such introducers, yet he failed to act
in respect of the risk that such introducers would influence the advice given
by supposedly disinterested IFAs to SVS’s clients. Mr Stephen’s knowledge
of and involvement in these arrangements and failure to act exposed SVS’s
clients to the risk of harm.

48. The absence of criticism of the governance procedures in this Notice should

not be taken to mean that the Authority is content with the governance
systems within SVS in relation to its investment decisions. In particular, the
Authority considers that Mr Virk influenced the Model Portfolio investment
decisions, and that those decisions were made before the Investment
Committee considered the relevant investments.

10 https://www.fca.org.uk/news/news-stories/investment-advisers-responsibilities-accepting-business-
unauthorised-introducers-lead-generators

49. COBS 2.3A.15R11 came into force on 3 January 2018 and provided that

discretionary managers must not accept fees or commissions from any third
party in relation to the provision of the relevant service to the client. Mr
Stephen knew that commissions were received. Accordingly, he knew the
true factual position. The level of commissions received by SVS were not
minor, nor non-monetary, and nor could they be said to have been paid for
third party research.

50. If legal advice was provided that the commissions were acceptable, the

Authority considers that it could only have been reasonably provided on an
erroneous understanding of the factual position. Mr Stephen has not
explained the nature of that advice or how SVS’s receipt of commissions
could have complied with the relevant rules.

51. In addition, the Authority refers to the following comments in Financial

Conduct Authority v Forster and others12: “However, it is equally important
to emphasise that an independent legal opinion is not a get-out-of-jail-free
card. The term "a legal opinion" covers a bewildering array of different forms
of advice: some absolute; some conditional; some tentative; and all based on
a series of factual assumptions whose accuracy is generally outside the scope
of knowledge of the legal advisor. There can be no hard rule as to the legal
effect of "a legal opinion" – everything depends on the circumstances”.

52. Whatever legal advice SVS and Mr Stephen received, the Authority considers

that it cannot change the factual position, which was within Mr Stephen’s
knowledge. Accordingly, the Authority considers that, during the Relevant
Period, the receipt of commission by SVS was in direct contravention of COBS
2.3A.15R and that Mr Stephen did not take reasonable steps to ensure that
SVS was compliant with the rules relating to inducements.

Fairness and disclosure

53. Mr Stephen considers that an adequate disclosure exercise has not been carried out

by the Authority. This has created a situation whereby crucial evidence relating to key
events, is missing.

54. Had this information been disclosed, it would have revealed the internal challenges

that Mr Stephen faced, as well as his efforts to try and ensure that the SVS directors
and the Model Portfolio managers and team acted in a compliant manner. Mr Stephen
was denied access to all his SVS emails and SVS records. This lack of access and lack
of adequate disclosure has resulted in Mr Stephen being severely hampered in his
ability to properly defend himself.

11 COBS 2.3A.15R(1) This rule applies where a firm provides a retail client in the United Kingdom with… (c)
portfolio management services.
(2) The firm must not accept any fees, commission, monetary or non-monetary benefits which are paid or
provided by … any third party … in relation to the provision of the relevant service to the client. …
(3) Paragraph (2) does not apply to:
(a) acceptable minor non-monetary benefits (see COBS 2.3A.19R); (b) third party research received in
accordance with COBS 2.3B (see COBS 2.3B.3R).

12 Financial Conduct Authority v Forster and others [2023] EWHC 1973 (Ch) at paragraphs 248 and 249
https://www.bailii.org/ew/cases/EWHC/Ch/2023/1973.html

55. Mr Stephen points to a number of disclosure failures during the investigation including

disclosure of relevant material subsequent to his oral representations meeting. The
Tribunal has recently expressed concerns with the Authority’s disclosure failures in
Seiler and others v Financial Conduct Authority13 and found that it could not be
satisfied there were no other relevant documents that should have been disclosed.
The same issues arise in Mr Stephen’s case resulting in unfairness towards him.

56. The Authority through the relevant team in the Enforcement and Market

Oversight Division has responded to all the concerns related to disclosure
which have been raised by Mr Stephen. The Authority’s disclosure
obligations, which apply to the giving of the Warning Notice and this Notice
to Mr Stephen, are set out in section 394 of the Act. This requires the

Authority 14 to allow the recipient of a specified statutory notice access to:
(1) the material on which the Authority relied in taking the decision which
gave rise to the obligation to give the notice; and (2) any secondary material
which, in the Authority's opinion, might undermine that decision.

57. The Authority accepts there has, on occasion, been late disclosure, but it is

satisfied, as at the date of this Notice, that there are no other relevant
documents that should have been disclosed and does not consider that any
unfairness has resulted to Mr Stephen as a result.

58. The financial penalty is disproportionate.

59. The concerns raised within the Notice focus entirely on one small part of SVS’s

business, namely the Model Portfolio (25% of SVS’s total regulated business during
the Relevant Period). In so doing, the Authority fails to understand, and therefore fails
to take into account, that as the Compliance Officer, Mr Stephen was responsible for
compliance matters across the whole of the business, which accounted for the vast
majority (around 75%) of SVS’s revenues. This creates a distorted view as to how Mr
Stephen discharged his duties as the Compliance Officer. Even in relation to the Model
Portfolios, the Financial Ombudsman Service did not uphold any of the complaints
made during the Relevant Period.

60. As there is no criticism of Mr Stephen’s conduct and performance in relation to his

work regarding the remaining 75% of the SVS’s regulated business, Mr Stephen
considers that it is not fair and/or proportionate that no pro-rata adjustment has been
applied to his relevant income figure for the calculation made at Step 2.

61. The Authority has calculated the financial penalty by following the guidance

on an individual’s “relevant income” as set out in DEPP 6.5B.2G(1) and (3).

13 Seiler and others v Financial Conduct Authority [2023] UKUT 00133 (TCC)
https://www.gov.uk/tax-and-chancery-tribunal-decisions/thomas-seiler-louise-whitestone-and-gustavo-
raitzen-v-the-financial-conduct-authority-2023-ukut-00133-tcc

14 Subject to statutory exceptions.

62. “Relevant income” is the gross amount of all benefits received by the

individual
from
the
employment
in
connection
with
which

the breach occurred (the “relevant employment”), and for the period of
the breach. The guidance makes clear that the Authority recognises that “in
some cases an individual may be approved for only a small part of the work
he carries out on a day-to-day basis. However, in these circumstances the
Authority still considers it appropriate to base the relevant income figure on
all of the benefit that an individual gains from the “relevant employment”,
even if their employment is not totally related to a controlled function”.

63. The Authority considers that the same principle applies in Mr Stephen’s case:

it is appropriate to base the relevant income figure on all the benefit that Mr
Stephen gained from his employment at SVS during the Relevant Period, even
if the matters described within this Notice relate to the Model Portfolios only.
Accordingly, the Authority considers that it is fair and proportionate not to
make a pro-rata adjustment to his relevant income figure for the calculation
made at Step 2.