SVS Securities Plc has the right to refer this Notice to the Upper Tribunal to
determine the reference by either dismissing it; or remitting the matter to the
Authority with a direction to reconsider and reach a decision in accordance with
the findings of the Tribunal.

FIRST SUPERVISORY NOTICE

To:
SVS Securities Plc

1.
ACTION

1.1
For the reasons given in this Notice, and pursuant to section 55L of the Act, the
Authority has decided to impose the requirements set out at paragraphs 1.2 to
1.15 below (“the Requirements”) on the Part 4A permission of SVS, with immediate
effect.

1.2
SVS (whether directly or through its agents) must not, without the prior written
consent of the Authority, carry out any regulated activities save that it may carry
out the activity of safeguarding and administering custody assets, only to the
extent required to facilitate the movement of client money and custody assets as
permitted in paragraph 1.10.

1.3
SVS must immediately, and in any event by no later than 5pm on 5 August 2019,
close all open FX positions held by it, whether on its own account or on account of
its clients and require any monies held by third parties in connection with SVS’s FX
trading activities to be returned to SVS.

1.4
By 5pm on 5 August 2019, SVS must notify in writing:

a) all its Clients;

b) all financial advisers which it knows or believes act as agents for its Clients;

c) all platforms which SVS uses to manage or trade assets;

d) the custodians of all assets managed by SVS, and

e) the sub-custodians of all assets held by SVS,

of the terms and effects of these Requirements.

1.5
By 5pm on 5 August 2019, SVS must publish a notice in a prominent place on all of
its websites setting out the terms and effects of these Requirements.

1.6
As soon as practicable, and in advance of making the notifications in paragraph 1.4
and paragraph 1.5, SVS must agree the wording of these notifications with the
Authority.

1.7
Once the notifications referred to in paragraph 1.4 have been made, SVS must
provide to the Authority:

a) copies of the template notification sent to all Clients, financial advisers,

platforms, custodians and the fund manager;

b) a list of all parties, with their contact details, to whom notifications have

been sent pursuant to paragraph 1.4; and

c) confirmation that, to the best of its knowledge, SVS has sent notifications

pursuant to paragraph 1.4 to all relevant parties.

1.8
SVS must secure all books and records and preserve information and systems
relating to regulated activities carried on by it, and must retain these in a form and
at a location, to be notified to the Authority in writing no later than 7 days after the
coming into effect of these Requirements, such that they can be provided to the
Authority, or to a person named by the Authority, promptly on its request.

1.9
SVS must not accept any new client money or new custody assets, whether from
existing or new clients, in any of its business areas.

1.10 Paragraph 1.9 above does not apply to the acceptance of new monies or custody

assets from existing clients and/or third parties by SVS as a result of or in relation
to the following:

a) receipt of dividends or coupons;

b) rights issues;

c) corporate actions including maturing bonds; and

d) settlement of trades instructed but not yet settled as at the date of the

Requirements.

1.11 SVS must not, without the prior written consent of the Authority, and save as

provided for in paragraph 1.12 below, in any way dispose of, withdraw, transfer,
deal with or diminish the value of any of its own assets, and any client money and
custody assets it holds for clients (whether in the United Kingdom or elsewhere).
For the avoidance of doubt, this requirement includes any custodian accounts,
client transaction accounts or any other account operated by or held with third
parties on SVS’s behalf.

1.12 Paragraph 1.11 does not apply to:

a) monetary payments made by SVS of its own monies, in the ordinary course

of business, amounting to no more than £5,000 whether as a single
transaction or as a combination of related transactions; or

b) payment of fees and disbursements to Ashurst LLP and Leonard Curtis in

relation to their assistance to SVS in relation to this Notice.

1.13 For the avoidance of doubt paragraphs 1.11 and 1.12 above are an assets

requirement within the meaning of section 55P(4)(a) of the Act.

1.14 A CF1 of SVS Securities Plc shall send to the Authority by email by 12 noon every

day, until such time as it is notified otherwise in writing by the Authority:

a) written confirmation that SVS Securities Plc is in compliance with these

Requirements;

b) daily bank statements for all SVS firm and client bank accounts; and

c) daily account statements from all custodians or sub-custodians holding

custody assets on behalf of SVS.

1.15 The CF10A of SVS shall send to the Authority by email each Friday by 12 noon as

set out below, until such time as it is notified otherwise in writing by the Authority:

a) weekly client money reconciliations, including any details of client monies

held as prudent segregation; and

b) on the first Friday of each calendar month, the custody assets

reconciliations.

1.16 The
Requirements,
which
take
immediate
effect,
expand
the
voluntary

requirements imposed on SVS’ Part 4A permission on 26 July 2019, following the
granting by the Authority of an application by SVS pursuant to section 55L(5)(a) of
the Act (“the Voluntary Requirements”) set out at Annex B.

1.17 Whereas by the Voluntary Requirements SVS agreed to cease all regulated

activities in relation to its Discretionary Fund Management Business and not to
accept any new clients into, or invest in any fixed income products in, any of its
other business areas, the Requirements imposed by this Notice require SVS to
cease all regulated activities across all its business areas, save where expressly
stated above, in relation to existing as well as new clients and in relation to all
products.

2.
REASONS FOR ACTION

2.1
On the basis of the facts and matters described below, the Authority considers that
the imposition of the requirements set out above is necessary because:

a) SVS is failing to satisfy the Threshold Conditions for which the Authority is

responsible; and

b) it is desirable in order to advance the Authority’s consumer protection and

integrity objective.

2.2
In particular, it appears to the Authority, on the basis of the facts and matters set
out in this Notice, that SVS is failing to satisfy: (a) the appropriate resources
Threshold Condition because they appear to lack the necessary financial and non-
financial resources; and (b) the suitability Threshold Condition.

2.3
The Authority has also concluded, on the basis of the facts and matters set out in
this Notice that, the exercise of the power to impose the Requirements is desirable
in order to advance the Authority’s operational objective of consumer protection
(section 1C of the Act) in order to ensure an appropriate degree of protection for
consumers, and the Authority’s operational objective of integrity (section 1D) in
order to protect and enhance the integrity of the UK financial system.

2.4
The Authority considers that SVS has breached a number of the Principles for
Businesses (PRIN) and a number of specific rules in the Authority’s Handbook,
including repeated serious breaches of the rules relating to conflicts of interest.
Several members of SVS’s current senior management appear to the Authority to
have been closely involved in some of the conduct which has resulted in these
breaches. As a result, and given the Authority’s serious concerns over the integrity
of certain SVS directors, and the general lack of proper governance or effective
controls at SVS, the Authority considers that SVS is not currently satisfying the
Threshold Conditions for Suitability and Appropriate non-financial resources.

2.5
The Authority is concerned that SVS is conducting its business in a way that
creates an ongoing risk to consumers. Further, the scale of the uncertainty over
investments promoted and/or managed by SVS creates the potential for a large
number of consumers to suffer material investment losses.

2.6
The real possibility of such an outcome means that the Requirements are necessary
to prevent SVS’s regulatory failings leading to a series of events that ultimately
cause damage to the integrity of the United Kingdom financial system. This
approach is consistent with the Authority’s operational objectives.

2.7
Accordingly, the Authority is satisfied that it is a proportionate use of its powers
under the Act to impose the Requirements with immediate effect.

3.
DEFINITIONS

3.1
The definitions below are used in this First Supervisory Notice:

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

“AIM” is a multilateral trading facility operated and regulated by the London Stock
Exchange Plc;

“the Appropriate Resources Threshold Condition” means the threshold condition set
out in paragraph 2D of Schedule 6 to the Act;

“the Authority” means the body corporate previously known as the Financial
Services Authority and re-named on 1 April 2013 as the Financial Conduct
Authority;

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

“the Authority’s register” means the Financial Services Register, published at
https://register.fca.org.uk/;

“CASS” means the Authority’s Client Assets Sourcebook in the Handbook;

“Clients” means the natural persons or other clients named in SVS’s records as the
investors for whom it manages investments and also includes any entity (such as
trustees for SIPPs) holding, managing or administering assets on behalf of such
investors;

“COBS” means the Authority’s Conduct of Business Sourcebook in the Handbook;

“PROD” means the Authority’s Product Intervention and Product Governance
Sourcebook;

“the Requirements” means the requirements imposed on SVS pursuant to section
55L of the Act, set out in paragraphs 1.2 to 1.17 of this Notice;

“the Suitability Threshold Condition” means the threshold condition set out in
paragraph 2E of Schedule 6 to the Act;

“SVS” means SVS Securities Plc;

“SYSC” means the Authority’s Senior Management Arrangements, Systems and
Controls Sourcebook in the Handbook;

“the Threshold Conditions” means the threshold conditions set out in Part 1B of
Schedule 6 to the Act; and

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

4.
FACTS AND MATTERS

Background

4.1
SVS has been regulated by the Authority since 9 April 2003. It has permission
under Part 4A of the Act to carry out a range of regulated advisory and
transactional activities. Its principal business activities include: 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.

SVS’s senior management

4.2
SVS’s management team includes, amongst others, the following individuals:
Demetrious Christos Hadjigeorgiou (CEO) who has been approved to perform the
CF3 (CEO) controlled function since 1 May 2018, having been approved to perform
the CF1 (Director) controlled function since 4 January 2017; David John Alexander
Stephen who has been approved to perform the CF10 (Compliance oversight) and
CF11 (Money laundering) controlled function since 6 August 2014; Andrew John
Alec Flitcroft who has been approved to perform the CF2 (Non-executive director)
controlled function since 14 October 2016; Kulvir Virk who has been approved to
perform the CF1 (Director) controlled function since 9 April 2003; and Ruchir
Rupani (Finance Director) who has been approved to perform the CF1 (Director)
controlled function since 23 April 2018.

SVS’s services to its clients

4.3
SVS’s four main services, or business areas, are:

•
Advisory - traditional stockbroking services (private client broking) on an
advisory basis to both retail and Institutional clients. This also includes
taking part in AIM listings and secondary placings on a principal basis
(“Advisory”).

•
Discretionary – Investment into model portfolios or custom-made portfolios
by one of the SVS Discretionary team (“DFM Business”).

•
Execution only - online equity, ISA, SIPP trading on an execution only basis
(“Execution”).

•
Foreign exchange (“FX”) trading - Retail online execution only FX business
that operates under the trading name of SVSFX.

4.4
SVS’s Advisory service purports to provide advisory clients, both retail and
Institutional, with “a comprehensive dealing service in UK listed and quoted
equities; advice on investment decisions tailored to a client’s objectives and
financial situation suitable investment ideas tailored to a client’s attitude to risk;
personal attention to queries; valuations and reports, if available, and a nominee
and custody service”. SVS also takes part in AIM listings and secondary fund-
raising placings where “we believe there will be potential growth for our Advisory
clients”.

4.5
The model portfolios invest in a mixture of equities, fixed income & unit trusts and
can be tailored to meet different client investment objectives. The Model Portfolios
are: GIA Income, GIA Mixed, GIA Aggressive Growth, ISA Income, ISA Mixed and
ISA Growth.

Recent supervisory contact with SVS

4.6
Following information provided to the Authority by SVS during 2017, the
Authority’s Supervision Department (“Supervision”) wrote to SVS on 23 January
2018 setting out its concerns over the lack of due diligence, high concentration and
liquidity risk in relation to bonds issued by Corporate Finance Bonds Limited
(“CFBL”). Supervision asked SVS to consider the risks posed by these investments
and to act on the concerns set out its January 2018 letter On 1 February 2018, SVS
responded giving assurances that its Board would address these concerns.

4.7
On 13 May 2019, Supervision sent an information request to SVS prompted in part
by complaints from its customers about the make-up and transparency of SVS’
Model Portfolios. On 16 May, SVS provided the Authority with information,
including an explanation of its approach to due diligence on investments in its
model portfolios. Specifically, SVS informed the Authority that its due diligence into
new bond products included: (a) establishing that those investments were listed on
recognised exchanges; (b) open-source searches; and (c) reliance on the due
diligence of regulatory bodies.

4.8
On 2 July 2019, Supervision conducted a site-visit at SVS’s offices.

4.9
Supervision conducted a review of documents and correspondence obtained during
the 2 July site visit. On 19 July 2019, Supervision wrote to SVS setting out a
number of regulatory concerns resulting from the visit, and proposing the
imposition of voluntary requirements on SVS’s Part 4A permission.

4.10 Supervision’s review did not substantiate SVS’s description of due diligence steps

for prospective investments that SVS provided to the Authority in its written
response dated 16 May 2019. For a number of key investments in its model
portfolios (notably CFBL bonds and Ingard Property Bond), SVS committed to
invest in these products without carrying out any evident relevant and timely due
diligence assessment. Instead, for example, SVS provided assistance and support
to one bond issuer to help get its new bond listed, committed to purchase of that
new bond products to a certain value prior to listing, advanced funds to a bond
issuer to help cover the costs of listing the bond on an exchange and secure a
rating. SVS also agreed to provide a price on Bloomberg and a secondary market in
the CFBL bonds. This would potentially improve the liquidity of the bonds and so
attract further investment.

4.11 On 26 July 2019, following discussions with Supervision, SVS applied to the

Authority pursuant to section 55L(5)(a) for the imposition of the Voluntary
Requirements on its Part 4A permission, by which SVS agreed: in relation to its
DFM Business: not to carry out any regulated activities, not to accept any new
client money or new custody assets (without the Authority’s consent and with
exemptions permitting certain largely administrative activities), and not to accept
any new clients into any of its other business areas (Advisory, Execution and FX).
SVS also agreed not to invest in any fixed income products across all business
areas. An assets requirement was also imposed across all business areas as were
certain requirements relating to record keeping, client asset reconciliations, capital
preservation and regulatory reporting (see the Voluntary Requirements at Annex
B).

Breaches of the Product Intervention and Product Governance Sourcebook
(“PROD”)

4.12 During the 2 July site visit, Supervision interviewed Mr Hadjigeorgiou and Mr A (a

Portfolio Manager), who both stated that SVS had little detailed data regarding the
composition of CFBL’s book of loans, on which the bonds are based. Both stated
that for its ongoing due diligence into the bond products and the performance of
the underlying loans, SVS had relied almost entirely upon CFBL’s assurances.
Internal SVS correspondence from March 2019 reviewed by the Authority states
that SVS lacked the data needed to monitor these investments, and suggests that
SVS only requested the information from CFBL in response to a request from a SIPP
trustee.

4.13 This is despite the provisions of PROD 3.3.1R which state 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.

4.14 Mr Hadjigeorgiou informed Supervision during the visit that he believed the CFBL

bonds to be one of the strongest performing components in SVS’s model portfolios.
The Authority does not consider this assessment to be supported by evidence. It
appears to be based on accepting at face value what limited information SVS is
given about the bonds by CFBL, and the fact that the bond coupons get credited,
indicating that the bonds are still performing.

4.15 Supervision’s review of documents obtained during the visit indicates that SVS’

model portfolios have had a consistently high exposure to CFBL bonds in
circumstances in which SVS lacks adequate information about the underlying loan
recipients, their financial standing, their potential to meet high interest rates set by
CFBL, their ability to repay the principal sum at the end of the loan term, or the
performance of the loans. This information is needed to assess the bonds and
comply with the rule in PROD 3.3.3R that any investment product must be
distributed in accordance with the needs, characteristics and objectives of its target
market.

Concentration risk

4.16 By its letter of 23 January 2018, Supervision informed SVS of its concern over the

concentration risk which arose given that SVS invested in different series of the
CFBL bond within the same SVS model portfolio. In its response to the Authority on
1 February 2019, SVS acknowledged this concentration risk and the need to reduce
it. It appears to the Authority that SVS has not done this and still does not have
sufficient information to be able to assess the level of concentration risk from
different CFBL bonds.

4.17 Despite the concerns expressed by Supervision in January 2018, SVS has in fact

increased the exposure of its model portfolios to CFBL’s bonds. From 31 March
2018 to 13 May 2019, CFBL exposure increased in its Income (53% to 78%), Mixed
(46% to 61%) and Growth (45% to 51%) portfolios. These also include other
illiquid investments with high or unknown risks. SVS increased this exposure in
circumstances where it lacked information from CFBL properly to assess the risk of
these investments.

4.18 Furthermore, approximately 90% of SVS’ DFM Business customers are invested in

SVS’s model portfolios as a result of having received pension switching or pension
transfer advice. Despite this, SVS does not appear to have taken steps to identify
groups of end clients for whose needs, characteristics and objectives the CFBL
bonds was not compatible. This is despite the provisions of PROD 3.3.15R(3) which
require such steps to be taken. SVS appears to have relied instead on the
assessments carried out by each end client’s financial adviser.

Conflicts of interest and governance

4.19 Supervision has reviewed investment-related emails sent by SVS management

between 2016 and the present date. These demonstrate that SVS worked closely
with third parties, in particular bond issuers/product providers and professional

advisers, to help generate and sustain demand for the investment products offered
through SVS, including in its DFM model portfolios.

4.20 SVS has done this without apparent regard for the investment needs of customers

and with the result that these customers were subject to a series of high fees and
charges paid to SVS and to other transaction parties. In some cases, these fees,
commissions and charges amounted to over 20% of the customer’s total
investment. The approach taken by SVS to customer fees and charges is despite
the provisions of PROD 3.3.1R(3), which requires distributors to ensure that
financial instruments (such as the CFBL bonds) are distributed only when this is in
the best interests of the client.

4.21 PROD 3.3.10R also required SVS to identify the target market for the CFBL bonds,

and provides that when complying with this rule, SVS should consider factors such
as how the bonds fit with the needs and risk appetite of end-clients (PROD 3.3.11G
(1)) as well as the impact of charges on the end clients (PROD 3.3.11G (2)).

4.22 Supervision’s review has found no documentation recording that SVS had carried

out these assessments.

Breaches of COBS

4.23 The high level of fees and the associated arrangements in some instances represent

a level of inducement that puts at risk SVS’ ability to act in the best interests of its
customers. For example:

a) from at least two of the bond issuers whose products SVS included in its

model portfolios, SVS received 10% commission on the “investment” funds
it obtained through financial advisers. As part of the fee agreement it
reached with CFBL, SVS also received a further 2% fee for “administrative
services” which included support as a market maker and updating pricing of
CFBL bonds.

b) In its agreement with another issuer whose bond it included in its model

portfolios, SVS was paid an additional 2% fee which was described as a
“corporate finance fee”. All these fees were determined by reference to the
amount of investment by SVS in the relevant product.

4.24 In the absence of any explanation from SVS, the Authority is concerned that the

amount of the payments (expressed as a percentage of the sums invested),
together with the trigger for payment (channelling investor funds into bond
products) may contravene restrictions on the payment of inducements, including
commission, in COBS; and the Authority has found no evidence to indicate that the
10% payments received by SVS were necessary for the investment services it
provided. In addition, SVS pays a fee to introducers where investments have been
procured by them. SVS has informed the Authority that this fee is currently 6% of
the sum invested. It is paid out of the sum transferred prior to investment.

4.25 The Authority is concerned that this high level of fees and charges has negatively

impacted customers. For example, once account is taken of the cumulative effect of
fees and charges incurred in the transfer/switch and reinvestment of a pension, a
customer’s investment sum is reduced in some cases by nearly a quarter. The
extent of the total fee burden on customers also raises concerns that some of fees
may not have been properly disclosed in accordance with the disclosure rules in
COBS 6, or the general information disclosure rule in COBS 2.2.1R.

Breaches of SYSC

4.26 SVS has repeatedly failed to properly identify, record and manage conflicts of

interest in respect of SVS and its directors’ connections to, and interests in, bond
issuers whose products SVS included as investments in the DFM model portfolios.
This is despite the requirement in SYSC 10/1/7R that firms maintain and operate
effective organisational administrative arrangements with a view to taking all
reasonable steps to prevent conflicts of interests adversely affecting the interests of
its clients.

4.27 SVS has breached this requirement on several occasions in circumstances where an

actual conflict of interests was, or should have been apparent to the relevant
director and to the rest of SVS’ senior management. Supervision’s review has found
no evidence that SVS had on any of these occasions carried out the assessment
that is required by SYSC 10.1.4R.

4.28 SVS’s close relationship with one bond provider, Ingard Financial Limited

(“Ingard”), included up-front payments for Ingard’s professional fees to help Ingard
to secure a listing on a recognised exchange (and to apply for a rating). At the time
this took place, Mr B was serving as both a director of SVS and


shareholder of Ingard. SVS decided to invest funds on behalf of

its DFM customers in Ingard’s investment products. During his interview with the
Authority on 2 July 2019, Mr Hadjigeorgiou stated that SVS only disclosed Mr B’s
conflict of interests in the statements sent to investors after concerns were raised
by SIPP trustees. An e-mail between Mr Hadjigeorgiou and Mr B in October 2018
indicated that SVS had assured a SIPP provider in January 2018 that it would seek
to sell down the Ingard holding on account of the conflict of interests, but had not
yet done so.

4.29 Mr Flitcroft was the sole CF2 non-executive director of SVS when he introduced

Angelfish Investments Plc (“Angelfish”) to SVS as a potential investment for the
SVS model portfolios in mid-2018. He was also a director of Angelfish. SVS
included Angelfish preference shares in its model portfolios. In late 2018, Mr
Flitcroft resigned as a director of Angelfish on account of the conflict of interests,
though continued to work for Angelfish as an adviser.

4.30 Neither Mr Flitcroft nor Mr B disclosed to the relevant clients of SVS their

connection to the respective investments until after those investments had been
made, and only once concerns had been raised with SVS by SIPP trustees. SVS’
apparently reactive approach to conflicts of interest is a matter of serious concern
to the Authority. SYSC 10.1.8R requires that SVS fully disclose conflicts of interest
to clients prior to undertaking the relevant business, where arrangements to
manage that conflict under SYSC 10.17R would be insufficient. In both instances,
no proper arrangements were in place at SVS and disclosures were not made to
clients until after their funds had been committed to the investments. This
approach calls into question the integrity of both these directors and raises
concerns about the lack of challenge from those other Board members who were
aware of the conflicts of interests and of the approach taken by SVS at the time
these investments were made.

Lack of appropriate challenge within SVS’ business to the selection of investments

4.31 Supervision’s review of SVS’s correspondence and documents shows that its

business model and its approach to choosing and managing investments met with
little or no challenge from either SVS’s sole non-executive director, Mr Flitcroft, or

from SVS’s CF10, Mr Stephen. Challenge appears to have come from independent
third parties, such as SIPP providers/trustees.

4.32 The Authority has also identified financial connections between SVS and Mr C, a

senior figure at CFBL. An entity controlled by Mr C has provided SVS with a loan
facility of £1,000,000. This appears to be secured by a fixed and floating charge
over SVS’s business.

4.33 The Authority is concerned that SVS may have allowed Mr C to influence its

investment decisions and strategy, including for the DFM model portfolios. For
example, the loan facility provided to SVS by CFBL raises concerns about SVS’
ability to take investment decisions on behalf of its DFM Business customers on an
independent basis.

The charge in favour an entity controlled by Mr C remains in place at Companies
House, and its status is “outstanding”. An e-mail from CFBL to Mr Hadjigeorgiou
dated 20 December 2018 indicated that the loan balance then stood at £225,000
and that SVS had been in arrears on its repayments since April 2018. When Mr
Hadjigeorgiou was asked about this loan during his interview by the Authority on 2
July 2019, he stated that he was aware that there had been a loan from CFBL but
told the Authority that he was unsure whether it was still outstanding.

Misleading the Authority

4.34 Supervision understood from its recent discussions with SVS that exposure to

illiquid fixed-income bonds/products was limited to SVS’ model portfolios. When
asked by the Authority during his interview on 2 July 2019 whether such products
were held outside the model portfolios, Mr A, a portfolio manager at SVS, stated
that the products sat exclusively in the model portfolios. During a call on 24 July
2019 between SVS, its legal advisers and the Authority, SVS informed the
Authority that there appear to have been coding errors which suggested that
advisory clients were exposed to the fixed income products of concern to the
Authority. SVS informed the Authority that the only such exposure had been in
2015, before the model portfolios were set up. The clear implication of SVS’
statement was that advisory clients of SVS are not currently exposed to these
fixed-income products.

4.35 Subsequent examination of SVS records relating to its advisory, ISA and online

trading pool, shows that these assertions were incorrect; the advisory pool contains
an exposure to some of the same non-liquid assets as the model portfolios:

•
ANGELFISH INVESTMENTS - £741k

•
INGARD PROPERTY BOND 2 DAC - £3m

•
INGARD PROPERTY BOND DAC - £2.6m

•
INNOVATION CAPITAL FINANCE - £197k

•
CORPORATE FINANCE BONDS LIMITED SERIES 3 - £53k

•
CORPORATE FINANCE BONDS LIMITED SERIES 5 - £1.7m

•
CORPORATE FINANCE BONDS LIMITED SERIES 6 - £1.6m

•
CORPORATE FINANCE BONDS LIMITED SERIES 8 - £777k

•
CORPORATE FINANCE BONDS LIMITED SERIES 9 - £17.8m

•
CORPORATE FINANCE BONDS LIMITED SERIES 10 - £174k

4.36 It also appears that there are SVS holdings in the online pool:

•
SVS SECURITIES PLC BOND (BLRZNY9) - £231k

•
SVS SECURITIES PLC (B6WC4Q9) - £176k

4.37 And in the Advisory account:

•
SVS SECURITIES PLC BOND (BLRZNY9) - £9k

•
SVS SECURITIES PLC (B6WC4Q9) - £1.3m

4.38 The discovery of these holdings in the advisory pool raises concerns that issues

initially restricted to SVS’ DFM model portfolios are apparent in other business
lines.

4.39 During the Authority’s visit to SVS on 2 July 2019, Mr Hadjigeorgiou was asked

about SVS’ remuneration arrangements. Mr Hadjiigeorgiou acknowledged that SVS
received a commission payment of 10% of the funds invested. When pressed about
any other arrangements with CFBL, Mr Hadjigeorgiou stated that SVS had been
paid by Specialist Advisers Limited for some help producing brochures, but added
by way of explanation that “the investment opportunity did not go ahead”.
Documents reviewed by the Authority indicate that payments to Specialist Advisors
Limited were in fact made as part of a more permanent commission arrangement
between SVS and CFBL. As noted in paragraph 4.23(b) above, SVS and CFBL
agreed an additional fee of 2% of the funds invested. Mr Hadjigeorgiou is copied
into correspondence with CFBL in March 2017 in which this 2% fee is described as
an “administration fee” that should be invoiced to Specialist Advisors Limited. An
invoice in the amount of £26,423.50 from SVS to Specialist Advisors Limited dated
31 March 2017 refers to “2% Fee for Series 4 Bond raised”.

4.40 The Authority is concerned that SVS has not been open and cooperative in its

engagement with Supervision, and failed to disclose full information regarding its
customers’ exposure to illiquid fixed-income bonds, in breach of Principle 11.

4.41 Mr Hadjigeorgiou provided the Authority with an explanation of SVS’ fee

arrangements with CFBL that appears to be materially inaccurate. This raises a
significant concern over the reliability and completeness of information provided to
the Authority by SVS and provides further evidence that SVS is failing to satisfy the
threshold conditions.

Skill, care and diligence

4.42 Mr Hadjigeorgiou confirmed during the site-visit that SVS did not have a pricing

policy. No satisfactory explanations were provided during interviews with any of
SVS senior management to explain how SVS ensures the integrity of its asset
prices. The basis on which illiquid assets are valued is therefore not apparent to the
Authority.

4.43 The Authority’s concerns regarding the integrity of SVS’ asset prices are increased

by the following examples:

a) SVS’ Advisory account contains exposure to AMERICAPITAL ORD of

c.£8.5mn. This is the largest holding in this account. The extent to which
this security has an intrinsic value is unclear. Mr Bushell, SVS’s CF10a, told

Supervision that SVS still receives a price. However, the underlying
company has been dissolved, according to Companies House records.

b) SVS’ Advisory account contains exposure to AFFINITY DEVELOPMENTS PLC

for c.£6.4mn which is the second largest holding in this account. The asset
is held as a physical certificate. Companies House state that an
administrator was appointed over this company on 12 June 2019.

c) During the visit on 2 July, SVS provided a record of a holding in a related

entity, ANILANA INTL DEVEL PLC (FORMERLY AFFINITY GLOBAL), held as a
physical certificate with a value of c.£3.8mn. It appears that this valuation
has now been marked to zero.

d) Angelfish published its financial results in June this year, for the financial

year ending 31 December 2018. These accounts disclose that Angelfish is in
financial difficulties and is planning to restructure. As part of this
restructuring proposal, holders of Angelfish preference shares will be asked
to approve a plan to replace their preference shares with bonds. The
preference shares were due to mature in March 2021. Given the disclosures
Angelfish has now made to the market, coupled with the fact that it has
written off nearly £1million of bad debt and its remaining investments are in
small unlisted companies, there is the prospect that Angelfish will be unable
to repay SVS customers their investment of £4.2million, plus interest.

4.44 These issues raise concerns over the skill, care and diligence SVS is applying in

relation to valuations. Without appropriate valuation, it is unclear how SVS is able
to: perform appropriate selection and maintenance of the securities that constitute
the model portfolios; advise customers on those securities; and ensure the fair
treatment of customers.

4.45 In addition, email correspondence records that SVS encouraged IFAs to promote

SVS’s model portfolios as an investment solution specifically for clients who were
proposing a defined benefit pension transfer or SIPP switch. Yet SVS increased the
proportion of illiquid and high-risk bonds in its model portfolios. This is likely not
consistent with the needs and risk appetite of pension investors. In the conduct of
its DFM business, and its promotion off high-risk bonds to retail investors, the
Authority considers that SVS has failed to show due regard to the interests of its
customers, and failed to treat them fairly.

4.46 Accordingly, it appears to the Authority that SVS may have breached Principles 2

and 6.

CASS

4.47 On 2 July 2019, the Authority’s Client Assets Resolution Department (“CARD”)

conducted an assessment of SVS’ client assets arrangements and identified
deficiencies with its compliance with the Client Assets sourcebook (CASS). In
summary, the assessment identified the following failings:

a) in an e-mail dated 11 July 2019, Mr Bushell (CF10a) stated that SVS was

under-reporting custody assets by not including the value of eight accounts
which together have a value of around £85 million. This indicated a lack of
adequate checks and controls.

b) CARD expressed its concern with the general oversight and governance

around the CASS environment at SVS, including in respect documentation,
policies, reporting and escalation of issues.

c) the Client Money and Asset Return (“CMAR”) report of SVS did not state the

method or frequency of the internal custody record check. This is required
by CASS 6.6.13R. When asked about this during his interview with the
Authority on 9 July, Mr Bushell, the CF10a was unable to confirm the type of
reconciliation which was being conducted or how SVS has complied with
these requirements.

d) There were indications of other CASS issues, for example the treatment of

the FX margin on the internal client money reconciliations, which need
further investigation and explanation from the firm.

e) SVS’ CMAR report between April and May 2019 shows a material

inconsistency in the valuation of custody assets, which was confirmed by
SVS’ Finance Director, Ruchir Rupani. The April CMAR submission confirmed
a total value of custody assets of £249 million and the May CMAR
submission confirmed a total value of custody assets at £178 million. This
brings into question the reconciliation and valuation methodology, and
related systems and controls which should be in place to ensure that serious
errors are identified and corrected.

4.48 The Authority also has concerns about the financial resources of SVS. The

Authority notes that in June 2014 SVS issued the 5-year SVS Securities Bond. This
bond had a maturity date of 30 June 2019. During a meeting with the Authority on
31 July 2019, SVS disclosed that it has not paid some or all of the bondholders and
was unable to explain to the Authority how it proposes to meet this liability.

5.
CONCERNS

5.1
The regulatory provisions relevant to this First Supervisory Notice are set out in
Annex A.

5.2
Section 55L of the Act allows the Authority to impose a new requirement, or to vary
a requirement previously imposed by the Authority under section 55L, on an
authorised person if it appears to the Authority that the authorised person is
failing, or is likely to fail, to satisfy the Threshold Conditions (section 55L(2)(a)) or
it is desirable to exercise the power in order to advance one or more of the
Authority’s operational objectives (section 55L(2)(c)). This power is referred to as
the Authority’s own-initiative requirement power.

Breaches of the Principles for Businesses

5.3
The matters set out in paragraphs 4.27 to 4.30 above strongly indicate that SVS
the inadequate management/disclosure of conflicts of interest by SVS contravened
Principle 8 (a firm must manage conflicts of interest fairly, both between itself and
its customers and between a customer and another client) and Principle 9 (a firm
must take reasonable care to ensure the suitability of its advice and discretionary
decisions for any customer who is entitled to rely upon its judgment).

5.4
By investing DFM Business funds into products without carrying out adequate
independent reviews to assess the risk of the products or their compatibility for end
clients, the Authority considers that SVS breached Principle 6 of the Principles for

Businesses in the Authority’s Handbook. SVS is also likely to have breached
Principle 6 by its commission arrangements with bond issuers. In response to
enquiries from the Authority on these and other issues, SVS failed in several
instances to provide full and accurate information to the Authority, which the
Authority considers to be in breach of Principles 11 and 1.

Failing to satisfy Threshold Conditions

Appropriate Resources Threshold Condition

5.5
The Appropriate Resources Threshold Condition requires that the resources of an
authorised firm must be appropriate in relation to the regulated activities that it
carries on or seeks to carry on. SVS appears to be failing to satisfy the Appropriate
Resources Threshold Condition because it appears to lack the necessary non-
financial resources. Specifically, a majority of the current senior management
team, including those approved to perform significant influence functions, appear
to the Authority to have been closely involved, over an extended period, in some of
the conduct which has resulted in the breaches, and thereby do not demonstrate
the skills, experience and competence required to properly manage SVS’s affairs.

Suitability Threshold Condition

5.6
The Suitability Threshold Condition requires that an authorised firm must be a fit
and proper person having regard to all the circumstances.

5.7
COND 2.5.2G provides that the Authority will take into consideration anything that
could influence a firm’s continuing ability to satisfy the Suitability Threshold
Condition. COND 2.5.4G provides examples of the kind of general considerations to
which the Authority may have regard when assessing whether a firm will satisfy,
and continue to satisfy, the Suitability Threshold Condition. These include, but are
not limited to, whether the firm conducts its business with integrity and in
compliance with proper standards, has a competent and prudent management and
can demonstrate that it conducts its affairs with the exercise of due skill, care and
diligence. On the basis of these considerations, and the conduct described in the
Notice, it does not appear to the Authority that SVS is satisfying the Suitability
Threshold Condition.

5.8
The Authority observes that Threshold Conditions are minimum requirements
Parliament has enacted through the Act, that firms need to meet those minimum
requirements in order to be authorised in the first place, and in order to continue
carrying on regulated activities. It appears to the Authority that SVS is failing, or is
likely to fail, to satisfy those minimum requirements.

Desirable in order to advance the Authority’s operational objectives

5.9
Section 1B(3) of the Act provides that the Authority’s operational objectives include
the consumer protection and integrity objectives.

5.10 The Authority’s consumer protection objective is securing an appropriate degree of

protection for consumers. In considering what degree of protection for consumers
may be appropriate, the Act provides that the Authority must have regard to
several factors including, amongst others:

“the general principle that those providing regulated financial services should
be expected to provide consumers with a level of care that is appropriate

having regard to the degree of risk involved in relation to the investment or
other transaction and the capabilities of the consumers in question” (section
1C(2)(e)).

5.11 The Authority considers that the failings set out in this Notice suggest that SVS has

fallen well below this standard and is conducting its business in a way that creates
an ongoing risk to consumers, some of whom may be facing material investment
losses within personal pension portfolios.

5.12 The Authority’s integrity objective is protecting and enhancing the integrity of the

UK financial system. The integrity of the UK financial system includes, amongst
other matters, its soundness, stability and resilience (section 1D(2)(a)) and the
orderly operation of the financial markets (section 1D(2)(d)).

5.13 On the basis of the facts and matters set out in the Notice it appears to the

Authority that it is desirable to exercise the power under section 55L in order to
advance the Authority’s consumer protection and integrity objectives.

Timing of action

5.14 The Authority, having regard to the grounds for taking the action set out in

paragraphs 1.2 to 1.15 of this Notice, reasonably considers it necessary that the
Requirements should take effect immediately. The Authority has concerns over the
integrity of key individuals within SVS’ management, over the adequacy of SVS’
systems and controls and its ability or willingness to comply with the Authority’s
rules. The Authority also has immediate concerns over the adequacy of SVS’
financial resources. In light of these concerns, the requirements in paragraph 1
above are necessary to further the Authority’s operational objectives, noting in
particular that around 90% of clients in the SVS model portfolios invested after
receiving pension switching or pension transfer advice, so any investment loss may
represent a significant reduction or loss of retirement income.

5.15 It also reasonably considers it necessary that the Requirements should remain in

effect until the Authority is satisfied that SVS has demonstrated that it is, and will
remain, in compliance with the Threshold Conditions and with all applicable
regulatory rules and requirements.

6.
PROCEDURAL MATTERS

6.1
This First Supervisory Notice is given under section 55Y(4) and in accordance with
section 55Y(5) of the Act and is being served on SVS at its place of business as last
notified to the Authority.

Decision maker

6.2
The decision which gave rise to the obligation to give this First Supervisory Notice
was made by the Chair of the Regulatory Decisions Committee.

Representations

6.3
SVS has the right to make written and oral representations to the Authority
(whether or not it refers this matter to the Tribunal).

6.4
Any written representations must be made by 19 August 2019 or such later date
as may be permitted by the Authority. Written representations should be made to
the Regulatory Decisions Committee and sent to:

Lynn Cheesman
Decision-Making Committees Secretariat
The Financial Conduct Authority
12 Endeavour Square
London
E20 1JN

6.5
The Authority must be informed in writing of any intention to make oral
representations by 19 August 2019. If the Authority is not notified by this date,
SVS will not, other than in exceptional circumstances, be able to make oral
representations.

The Tribunal

6.6
SVS has the right to refer the matter to which this First Supervisory Notice relates
to the Tribunal. The Tax and Chancery Chamber is the part of the Tribunal which
amongst other things, hears references arising from decisions of the Authority.
Under paragraph 2(2) of Schedule 3 of the Tribunal Procedure (Upper Tribunal)
Rules 2008, SVS has 28 days from the date on which this First Supervisory Notice
is given to it to refer the matter to the Tribunal.

6.7
A reference to the Tribunal can be made by way of a reference notice (Form FTC3)
signed by or on behalf of SVS and filed with a copy of this First Supervisory Notice.
The Tribunal’s contact details are: The Upper Tribunal, Tax and Chancery Chamber,
Fifth Floor, Rolls Building, Fetter Lane, London, EC4A 1NL (telephone: 020 7612
9730; email: uttc@hmcts.gsi.gov.uk).

6.8
For further information on the Tribunal (including the power to vary time periods)
SVS should refer to the HM Courts and Tribunal Service website which will provide
guidance and the relevant form to complete. The relevant page on HM Courts and
Tribunal Service website can be accessed via the following link:

6.9
SVS should note that a copy of the reference notice (Form FTC3) must also be sent
to the Authority at the same time as filing a reference with the Tribunal. A copy of
the reference notice should be sent to Sam Clyndes at the Financial Conduct
Authority, 12, Endeavour Square, London, E20 1JN, Canary Wharf, London E14
5HS.

Access to Evidence

6.10 Section 394 of the Act does not apply to this First Supervisory Notice.

Confidentiality and Publicity

6.11 SVS should note that this First Supervisory Notice may contain confidential

information and should not be disclosed to a third party (except for the purpose of
obtaining advice on its contents).

6.12 SVS should note that section 391 of the Act requires the Authority, when the First

Supervisory Notice takes effect, to publish such information about the matter as it
considers appropriate.

Authority contacts

6.13 For more information concerning this matter generally, contact Andrew Foley,

Manager, Investment Intermediaries and Scams, Supervision (Investment,
Wholesale & Specialists) Division at the Authority (direct line: 020 7061 2108 or
email: andrew.foley@fca.org.uk ).

6.14 Any questions regarding the procedures of the Regulatory Decisions Committee

should be directed to the RDC Secretariat (email: DMCScaseinbox@fca.org.uk).

Mark Roberts, Manager, DMC Secretariat on behalf of
Tim Parkes
Chair, Regulatory Decisions Committee

ANNEX A

RELEVANT STATUTORY PROVISIONS

1.
The Authority’s operational objectives established in section 1B of the Act include
securing an appropriate degree of protection for consumers (section 1C) and
protecting and enhancing the integrity of the UK financial system (section 1D).

2.
Section 55L of the Act allows the Authority to impose a new requirement on an
authorised person, or to vary a requirement previously imposed by the Authority
under section 55L, if it appears to the Authority that the authorised person is
failing, or is likely to fail, to satisfy the Threshold Conditions (section 55L(2)(a)) or
it is desirable to exercise the power in order to advance one or more of the
Authority’s operational objectives (section 55L(2)(c)). This power is referred to as
the Authority’s own-initiative requirement power.

3.
Section 55N of the Act allows a requirement to be imposed under section 55L of the
Act so as to require the person concerned to take specified action (section
55N(1)(a)) or to refrain from taking specified action (section 55N(1)(b)). Section
55N(2) provides that a requirement may extend to activities which are not
regulated activities.

4.
Pursuant to 55P(4)(a) of the Act, an assets requirement means a requirement
prohibiting the disposal of, or other dealing with, any of the subject’s assets
(whether in the United Kingdom or elsewhere) or restricting such disposals or
dealings. If the Authority gives notice of such a requirement to any institution with
whom the subject has an account, the notice has the effects, for that institution,
set out in section 55P(6) of the Act. Those effects are that—

(a) the institution does not act in breach of any contract with the subject if,

having been instructed by the subject (or on the subject's behalf) to transfer
any sum or otherwise make any payment out of the subject's account, it
refuses to do so in the reasonably held belief that complying with the
instruction would be incompatible with the requirement, and

(b) if the institution complies with such an instruction, it is liable to pay to the

Authority an amount equal to the amount transferred from, or otherwise paid
out of, the subject's account in contravention of the requirement.

5.
Section 55Y of the Act allows a requirement imposed under the own-initiative
requirement power to take effect immediately (or on a specified date) only if the
Authority, having regard to the ground on which it is exercising its own-initiative
requirement power, reasonably considers that it is necessary for the variation or
imposition of the requirement to take effect immediately (or on that date). Section
391 of the Act provides that, when a supervisory notice takes effect, the Authority
must publish such information about the matter to which the notice relates as it
considers appropriate. However, the Authority may not publish information if, in its
opinion, publication of the information would be unfair to the person with respect to
whom the action was taken or proposed to be taken or prejudicial to the interests
of consumers.

6.
The Threshold Conditions represent the minimum standards which a firm is
required to satisfy, and continue to satisfy, in order to be given and to retain a Part
4A Permission. They are set out in Part 1B of Schedule 6 to the Act.

7.
The Appropriate Resources Threshold Condition provides, in relation to a person
(“A”) carrying on or seeking to carry on regulated activities which do not consist of
or include a PRA-regulated activity, that:

“The resources of A must be appropriate in relation to the regulated activities
that A carries on or seeks to carry on.”

8.
The matters which are relevant in determining whether A has appropriate non-
financial resources include the skills and experience of those who manage A’s
affairs.

9.
Appropriate resources: paragraph 2D(1) states that the resources of the firm must
be appropriate in relation to the regulated activities that it carries on or seeks to
carry on. Paragraph 2D(4) states that the matters which are relevant in
determining whether a firm has appropriate non-financial resources include- (a) the
skills and experience of those who manage the firm’s affairs.

10.
The Suitability Threshold Condition in paragraph 2E of Schedule 6 to the Act states
that:

“A must be a fit and proper person having regard to all the circumstances,
including—

(a) A’s connection with any person;

(b) the nature (including the complexity) of the regulated activities that A
carries on or seeks to carry on;

(c) the need to ensure that A’s affairs are conducted in an appropriate
manner, having regard in particular to the interests of consumers and the
integrity of the UK financial system;

(d) whether A has complied and is complying with requirements imposed by
[the Authority] in the exercise of its functions, or requests made by [the
Authority], relating to the provision of information to [the Authority] and,
where A has so complied or is so complying, the manner of that compliance;

(e) whether those who manage A’s affairs have adequate skills and
experience and have acted and may be expected to act with probity;

(f) whether A’s business is being, or is to be, managed in such a way as to
ensure that its affairs will be conducted in a sound and prudent manner;

RELEVANT REGULATORY PROVISIONS

The Principles for Businesses

11.
The Principles for Businesses (PRIN) are a general statement of the fundamental
obligations of firms under the regulatory system. PRIN 1.1.2R provides that they
derive their authority from the Authority’s rule-making powers as set out in the Act
and reflect the statutory objectives. The Principles are set out at PRIN 2.1.1, and
those relevant to this Notice are:

Principle 1 provides that a firm must conduct its business with integrity.

Principle 6 provides that a firm must pay due regard to the interests of its
customers and treat them fairly.

Principle 8 provides that a firm must manage conflicts of interest fairly, both
between itself and its customers and between a customer and another client.

Principle 9 provides that a firm must take reasonable care to ensure the
suitability of its advice and discretionary decisions for any customer who is
entitled to rely upon its judgment.

Principle 11 provides that a firm must deal with its regulators in an open and
cooperative way, and must disclose to the Authority appropriately anything
relating to the firm of which that regulator would reasonably expect notice.

Product Intervention and Product Governance

12.
The section of the Handbook entitled Product Intervention and Product Governance
Source Book (PROD) gives guidance to improve firms’ product oversight and
governance processes and to set out the Authority’s statement of policy on making
temporary product intervention rules. PROD has applied since 3 January 2018.

13.
PROD 1.1.2G provides that product oversight and governance refers to the systems
and controls firms have in place to design, approve, market and manage products
throughout the products’ lifecycle to ensure they meet legal and regulatory
requirements.

14.
PROD 1.1.3G provides that good product governance should result in products that:
(1) meet the needs of one or more identifiable target markets; (2) are sold to
clients in the target markets by appropriate distribution channels; and (3) deliver
appropriate client outcomes.

15.
PROD 3.3.1R provides that a distributor must: (1) understand the financial
instruments it distributes to clients; (2) 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 (3) ensure that financial instruments are distributed only when this is
in the best interests of the client (see COBS 2.1.1R(1)).

16.
PROD 3.3.3R provides that distributors must obtain from MiFID manufacturers
information to gain the necessary understanding and knowledge of the financial
instruments they intend to distribute in order to ensure that the financial
instruments will be distributed in accordance with the needs, characteristics and
objectives of the target market.

17.
PROD 3.3.10R provides that distributors must identify the target market and their
distribution strategy using: (1) the information obtained from manufacturers; and
(2) information they have on their own clients.

18.
PROD 3.3.11G provides that in identifying the target market and creating a
distribution strategy, distributors should consider: (1) the nature of the financial
instruments to be offered or recommended and how they fit with end clients’ needs
and risk appetite; (2) the impact of charges on end clients; (3) the financial
strength of the manufacturer; and (4) where information is available on the

manufacturer’s processes, how efficiently and reliably the manufacturer will deal
with the end client at the point of sale or subsequently, such as when complaints
arise, claims are made or the financial instrument reaches maturity.

19.
PROD 3.3.15R provides that: (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, and (3) distributors must identify
any groups of end clients for whose needs, characteristics and objectives the
financial instrument or investment service is not compatible.

Conduct of Business

20.
Chapter 2 of the section of the Handbook entitled the Conduct of Business
Sourcebook (COBS) gives guidance on firms’ conduct of business obligations.
COBS 2.2.1R provides, amongst other matters, that a firm must provide
appropriate information in a comprehensible form to a client about costs and
associated charges.

21.
COBS 6.1 imposes requirements relating to disclosure of information to clients that
are additional to the general requirement in COBS 2.2. COBS 6.1.9R provides,
amongst other matters, that a firm must provide a client with information on costs
and associated charges including, if applicable: (1) the total price to be paid by the
client in connection with the designated investment or the designated investment
business, including all related fees, commissions, charges and expenses, and all
taxes payable via the firm or, if an exact price cannot be indicated, the basis for
the calculation of the total price so that the client can verify it. The commissions
charged by the firm must be itemised separately in every case.

Senior Management Arrangements, Systems and Controls

22.
The section of the Handbook entitled Senior Management Arrangements, Systems
and Controls (SYSC) amplifies Principle 3, under which a firm must take reasonable
care to organise and control its affairs responsibly and effectively, with adequate
risk management systems.

23.
SYSC 10.1.4R provides that for the purposes of identifying the types of conflict of
interest that arise, or may arise, in the course of providing a service and whose
existence may damage the interests of a client, a management company must take
into account, as a minimum, whether the firm or a relevant person, or a person
directly or indirectly linked by control to the firm:

(1) is likely to make a financial gain, or avoid a financial loss, at the expense of

the client;

(2) has an interest in the outcome of a service provided to the client or of a

transaction carried out on behalf of the client, which is distinct from the
client's interest in that outcome;

(2A) in the case of a management company providing collective portfolio

management services for a UCITS scheme, (2) also applies where the service

is provided to, or the transaction is carried out on behalf of, a client other
than the UCITS scheme;

(3) has a financial or other incentive to favour the interest of another client or

group of clients over the interests of the client;

(4) carries on the same business as the client; or in the case of a management

company, carries on the same activities for the UCITS scheme and for another
client or clients which are not UCITS schemes; or

(5) receives or will receive from a person other than the client an inducement in

relation to a service provided to the client, in the form of monies, goods or
services, other than the standard commission or fee for that service.

24.
SYSC 10.1.7R provides that a firm must maintain and operate effective
organisational and administrative arrangements with a view to taking all
reasonable steps to prevent conflicts of interest as defined in SYSC 10.1.3R from
adversely affecting the interests of its clients. SYSC 10.1.8R provides that:

(1) If arrangements made by a firm under SYSC 10.1.7R are not sufficient to

ensure, with reasonable confidence, that risks of damage to the interests of a
client will be prevented, the firm must clearly disclose the following to the
client before undertaking business for the client:

(a) the general nature or sources of conflicts of interest, or both; and

(b) the steps taken to mitigate those risks.

(2) The disclosure must:

(a) be made in a durable medium;

(b) clearly state that the organisational and administrative arrangements

established by the firm to prevent or manage that conflict are not
sufficient to ensure, with reasonable confidence, that the risks of
damage to the interests of the client will be prevented;

(c) include specific description of the conflicts of interest that arise in the

provision of insurance distribution activities, investment services or
ancillary services;

(d) explain the risks to the client that arise as a result of the conflicts of

interest; and

(e) include sufficient detail, taking into account the nature of the client, to

enable that client to take an informed decision with respect to the
service in the context of which the conflict of interest arises.

Threshold Conditions

25.
The section of the Handbook entitled ‘Threshold Conditions’ (COND) gives guidance
on the threshold conditions. COND 1.2.3G provides that the Authority may exercise
its own-initiative powers under either section 55J or section 55L of the Act if,
among other things, a firm is failing to satisfy any of the Threshold Conditions or is
likely to do so.

26.
COND 2.4.2G(2) provides that, in the context of the Appropriate Resources
Threshold Condition, the Authority will interpret the term ‘appropriate’ as meaning
sufficient in terms of quantity, quality and availability and ‘resources’ as including
all financial resources, non-financial resources and means of managing its
resources; for example, capital, provisions against liabilities, holdings of or access
to cash and other liquid assets, human resources and effective means by which to
manage risks.

27.
COND 2.4.4G(2) provides that relevant matters to which the Authority may have
regard when assessing whether a firm will satisfy, and continue to satisfy, this
Threshold Condition include whether there are any indications that the firm will not
be able to meet its debts as they fall due, whether the firm has taken reasonable
steps to identify and measure any risks of regulatory concern that it may encounter
in conducting its business and has installed appropriate systems and controls and
appointed appropriate human resources to measure them prudently at all times
and whether the resources of the firm are commensurate with the likely risks its
will face.

28.
COND 2.5.2G provides that the Authority will take into consideration anything that
could influence a firm’s continuing ability to satisfy the Suitability Threshold
Condition. COND 2.5.4G provides examples of the kind of general considerations to
which the Authority may have regard when assessing whether a firm will satisfy,
and continue to satisfy, the Suitability Threshold Condition. These include, but are
not limited to, whether the firm conducts its business with integrity and in
compliance with proper standards, has a competent and prudent management and
can demonstrate that it conducts its affairs with the exercise of due skill, care and
diligence.

29.
Examples of the kind of particular considerations to which the Authority may have
regard when assessing whether a firm will satisfy, and continue to satisfy, the
Suitability Threshold Condition are outlined in COND 2.5.6G. These include whether
the firm is ready, willing and organised to comply with the requirements and
standards under the regulatory system and whether the firm has contravened any
provisions of the Act or the regulatory system.

30.
The Authority’s policy in relation to its own-initiative powers is set out in chapter 8
of the Enforcement Guide (EG), certain provisions of which are summarised below.

31.
EG 8.2.1 provides that the Authority will have regard to its statutory objectives and
the range of regulatory tools that are available to it, when it considers how it
should deal with a concern about a firm. It will also have regard to the
responsibilities of a firm’s management to deal with concerns about the firm or
about the way its business is being or has been run and the principle that a
restriction imposed on a firm should be proportionate to the objectives the
Authority is seeking to achieve.

32.
EG 8.2.3 provides that the Authority will exercise its formal powers under section
55L of the Act, where the Authority considers it is appropriate to ensure a firm
meets its regulatory requirements. EG 8.2.3(1) and (2) specifies that the Authority
may consider it appropriate to exercise its powers where it has serious concerns
about a firm or the way its business is being or has been conducted, where it is
concerned that the consequences of a firm not taking the desired steps may be

serious or where the imposition of a formal statutory requirement reflects the
importance the Authority attaches to the need for the firm to address its concerns.

33.
EG 8.2.6G(2) provides that examples of circumstances in which the Authority will
consider varying a firm’s permission because it has serious concerns about a firm,
or about the way it business is being or has been conducted include where, in
relation to the grounds for exercising the power under section 55L(2)(c), it appears
that the interests of consumers are at risk because the firm appears to have
breached any of Principles 6 to 10 of the Authority’s Principles (see PRIN 2.1.1R) to
such an extent that it is desirable that limitations, restrictions, or prohibitions are
placed on the firm's regulated activity.

34.
EG 8.3.1 provides that the Authority may impose a requirement so that it takes
effect immediately or on a specified date if it reasonably considers it necessary for
the requirement to take effect immediately (or on the date specified), having
regard to the ground on which it is exercising its own-initiative powers.

35.
EG 8.3.2 provides that the Authority will consider exercising its own-initiative
power as a matter of urgency where (1) the information available to it indicates
serious concerns about the firm or its business that needs to be addressed
immediately; and (2) circumstances indicate that it is appropriate to use statutory
powers immediately to require and/or prohibit certain actions by the firm in order
to ensure the firm addresses these concerns.

ANNEX B

The Voluntary Requirements imposed on SVS on 26 July 2019 with immediate effect
following an application by SVS pursuant to section 55L(5)(a) of the Act.

PART A –Discretionary Fund Management Business ("DFM")

Paragraphs 1 to 4 in Part A (Discretionary Fund Management Business) apply to SVS'
DFM business only.

Cease regulated activities

1.
SVS (whether directly or through its agents) must not, without the prior written

consent of the Authority, carry out any regulated activities apart from

(a) safeguarding and administering custody assets;
(b) as a result of the activities to facilitate the movement of client money and

custody assets as permitted in paragraph 3.

Client Money and Custody Assets

2.
SVS will not accept any new client money or new custody assets, whether from

existing or new clients.

3.
Paragraph 2 does not apply to the acceptance of new monies or custody assets
from existing clients and/ or third parties by SVS as a result of or in relation to the
following:

a)
Receipt of dividends or coupons;

b)
Rights issues;

c)
Corporate actions including maturing bonds; and

d)
Settlement of trades instructed but not yet settled as at the date of the
requirements.

PART B: Other Business Areas (execution only, advisory, FX)

Paragraphs 4 to 5 in Part B (Other Business Areas) apply to all of SVS' other business
areas, other than the DFM business.

4. In addition to its DFM service, SVS will not accept any new clients into any of its

other business areas.

Client Money and Custody Assets

5. For the avoidance of doubt, SVS is allowed to accept new client money and new

custody assets from existing clients in respect of regulated activities conducted in
the Other Business Areas.

PART C: All Business Areas

Paragraphs 6 to 14 in Part C (All Business Areas) apply to SVS Securities Plc business in
its entirety.

6. SVS will not, without the prior written consent of the Authority, and save as provided

for in paragraph 7 below, in any way dispose of, withdraw, transfer, deal with or
diminish the value of (i) any of its own assets, and (ii) any client money and custody
assets it holds for clients (whether in the United Kingdom or elsewhere). For the
avoidance doubt, this requirement includes any custodian accounts, client transaction
accounts or any other account operated by or held with third parties on SVS’s behalf.

7.
Paragraph 6 does not apply to:

(a) monetary payments made by SVS of its own monies, in the ordinary course of

business, amounting to no more than £5,000 whether as a single transaction
or as a combination of related transactions;


(b) payment of fees and disbursements to Ashurst LLP and Leonard Curtis in

relation to their assistance to SVS on this matter; or

(c) payments or transfers of client money held for clients of business lines other

than the DFM, amounting to no more than £5,000 whether as a single
transaction or as a combination of related transactions.

8. For the avoidance of doubt paragraphs 6 and 7 above are an assets requirement

within the meaning of section 55P(4)(a) of the Act.


Secure Records

9.
SVS must secure all books and records and preserve information and systems
relating to regulated activities carried on by it, and must retain these in a form
and at a location, to be notified to the Authority in writing no later than 7 days
after the coming into force of these Requirements, such that they can be provided
to the Authority, or to a person named by the Authority, promptly on its request.

Client Assets Reconciliations

10.
SVS will on the date of these Requirements, and on an ongoing basis as required
by the CASS rules, conduct a full reconciliation of all client money and custody
assets in accordance with the CASS Rules, including both an internal and external
reconciliation. Any shortfalls identified through this process should be notified by
email to the Authority immediately and corrected by the next business day. For
the avoidance of doubt, should consent of the Authority be required in accordance
with Paragraph 8 this should be requested immediately.

11.
For such time as this VREQ is in place, SVS will not remove capital from the
business.

12.
SVS will not invest in any fixed income products with immediate effect, across all
of its business areas.

13.
A CF1 of SVS shall send to the Authority by email by 14.00 every day, until such
time as it is notified in writing by the Authority written confirmation that SVS is in
compliance with these Requirements.

14.
The CF10A of SVS shall send to the Authority by email as set out below, until such
time as it is notified in writing by the Authority

a)
every Friday at 14.00, the client money reconciliation completed that day
including the corresponding statements of client bank accounts; and

b) on the first Friday of each calendar month, the custody assets

reconciliations.