FCA Inducements Case: When Commission Drives Product Allocation

On 17 August 2026 the Financial Conduct Authority issued a Final Notice to Demetrios Christos Hadjigeorgiou, the former director and chief executive of SVS Securities Plc. It imposed a financial penalty of £56,400 and an order prohibiting him from performing any senior management function and any significant influence function, under sections 66 and 56 of the Financial Services and Markets Act 2000.

The finding was a breach of Statement of Principle 6 of APER, a failure to exercise due skill, care and diligence in managing the business of the firm, over the period from 3 January 2018 to 2 August 2019.

The Final Notice also contains a series of findings that translate directly into tests a compliance function can run on its own product file.

1. The allocation tracked the commission

SVS ran a discretionary fund management business managing investments held for retail pension customers inside self-invested personal pensions. Customer money went into one of four model portfolios, which the firm's own marketing material described as high risk portfolios. During the relevant period 879 retail customers invested £69.6 million in them, with around 63% of that money allocated to fixed income.

For each fixed income product, the notice records both its share of the fixed income holdings and the commission the firm received for placing customer funds into it. The percentages below are the figures used by the FCA in that commission comparison, rather than an independently reconciled snapshot of the portfolios at a single date.

The conclusion drawn from that comparison is stated plainly in the notice: the amounts invested correspond with the amount of commission generated. The largest fixed income investment produced the greatest commission. The smallest was the only product that paid nothing at all.

Commission was calculated as a percentage of the customer funds directed into each product, which the FCA found incentivised the firm to maximise the flow of customer money into those products.

What this means in practice: compare the order of product allocations with the order of remuneration received by the firm. A close match does not prove that remuneration drove the allocation, but it creates an obvious question for the file: what client-outcome rationale explains the pattern?

2. What the inducement rule required

COBS 2.3A.15R came into force on 3 January 2018, in line with MiFID II. It provides that a firm must not accept any commission from any third party in the provision of a relevant service to retail clients.

On the FCA's analysis the payments SVS received fell within that prohibition from that date. They were expressed as a percentage of the customer funds invested and were triggered by channelling those funds into the bond products, and no evidence was found indicating that they were necessary for the services the firm provided. As holder of the CF1 Director and CF3 Chief Executive functions, Mr Hadjigeorgiou was found to have failed to take reasonable care to ensure the firm stayed within the rule. The notice describes the effect of the payments as putting the firm's independence at risk and compromising its ability to act in its customers' best interests.

The cost picture does not stop there. SVS charged commission of 1.5% on all transactions, reduced to 0.75% in April 2019. With an adviser fee of up to 4% on top, model portfolio customers lost up to 5.5% of their investment at the outset. SVS also took up to 10% of customer funds as commission in respect of fixed income products.

3. Who funded the commission

The ICFL example also shows where the payment ultimately came from. Due diligence material recorded that the 10% commission payable to SVS was to be added to the loans of the underlying borrowers. The notice sets out the explanation given on a conference call in February 2019: a borrower wanting to draw down net funds of £875,000 would take out a loan with a capital value of £1,000,000, repayable at the end of the period.

Elsewhere in the notice, the FCA concluded that the commission SVS took in relation to fixed income products increased the risk of product default, and so further reduced the likelihood that model portfolio customers would get back what they had paid in.

4. Due diligence performed after the decision

Timing was central to the FCA's findings on due diligence.

SVS entered into an agreement on 1 November 2018 to invest £10 million of customer funds in the ICFL bond, with commission of £1 million. It drew £750,000 of that commission up front, while experiencing liquidity and cashflow issues, and accounted for it as a loan in case it had to be repaid. The agreement was signed and the commission paid before any due diligence had been undertaken. What followed was, in the FCA's assessment, "in essence a formality", because the firm had already agreed to invest and had already been paid. A vote in February 2019 covered £2 million of the eventual £10 million; the remaining £8 million was never put to a vote.

Ingard Property Bond 2 followed a comparable pattern. The bond was listed on the Cyprus Stock Exchange on 11 December 2018 and SVS supported the listing. A SIPP trustee had required the bond to be rated before it could go into the model portfolios, and SVS provided support to Ingard to obtain that rating. Mr Hadjigeorgiou indicated that the firm was willing to invest up to £4.25 million, offered assistance in getting the bond rated having already committed to that investment, and then carried out due diligence on it. Given how closely the two firms were connected, the FCA again treated the due diligence as a formality, the decision to invest having in substance already been taken.

There was also a broader issue with the role SVS gave to exchange listing. The firm told the FCA that, when assessing whether a fixed-income investment was suitable for inclusion in the model portfolios, it relied on the investment already being listed on an HMRC-recognised stock exchange. That position was difficult to reconcile with ICFL: SVS had already agreed to invest and taken commission before the bond was listed.

The FCA's earlier concerns about CFBL were more specific. It considered that SVS had placed too much reliance on the bonds being listed on a recognised exchange and had not adequately assessed credit quality, duration or gross redemption yield against other offerings in the market. It was also concerned that SVS did not know the details of CFBL's underlying loan recipients.

PROD 3.3.1R and PROD 3.3.3R had applied since 3 January 2018. A distributor must understand the instruments it distributes, assess their compatibility with the needs of the clients it distributes to, and distribute only where that is in the client's best interests. An investment product must be distributed in accordance with the needs, characteristics and objectives of its target market. In relation to the ICFL Bond, the FCA found that SVS lacked the data needed to assess and monitor the product and comply with PROD 3.3.3R.

The practical test: reconstruct the chronology for a recent product addition: when the commercial commitment was made, when any payment was received, when substantive due diligence was completed and when formal approval followed. The important question is whether the due diligence was still capable of changing the investment decision. Also check what weight the file gives to a listing or rating, particularly where the firm itself helped to obtain it.

5. A concentration that fell while the exposure rose

The FCA raised due diligence concerns about the CFBL bonds on 24 November 2017, 4 January 2018 and 23 January 2018. Its letter of 23 January also set out concerns about concentration risk, liquidity risk and SVS's analysis of the bonds. On 1 February 2018 the firm replied in writing, accepting the issuer concentration risk and stating that it would look to reduce it.

At a board meeting on 14 March 2018 chaired by Mr Hadjigeorgiou, with roughly 40% of model portfolio assets held in CFBL bonds, the firm resolved as an interim measure that 50% of available fixed income cash could still be invested in CFBL products. Between 31 January and 11 May 2018 it invested a further £5,106,150 in one CFBL series.

The concentration figure did fall, from 39.3% at 31 March 2018 to 34.31% at 13 May 2019. It fell because the firm diluted the proportion by increasing its investments in other high risk illiquid fixed income products, including the ICFL bond, Ingard Property Bond 2 and a further tranche of Angelfish preference shares. The total value of customer funds sitting in the CFBL bonds had in fact increased. That, the regulator found, was not consistent with the assurance the firm had given.

The percentage improved. The exposure did not.

For concentration monitoring: a ratio has a numerator and a denominator, and a remediation programme measured on the ratio alone can be satisfied by moving either one. Where a concentration limit forms part of risk appetite, reporting the absolute exposure alongside the percentage, and attributing any fall to disposal or to growth elsewhere, keeps that distinction visible.

6. The disinvestment mark-down

In November 2018 the board decided to apply a 10% mark-down to the valuation of fixed income assets whenever a customer disinvested from the model portfolios. The rationale recorded in contemporaneous internal documentation was to earn additional income for the firm, at a point when it had financial concerns and needed new income streams.

It applied to every customer who disinvested, whatever the length of the holding. That cut across the model portfolio brochure provided to customers, which stated that exit charges would differ according to how long a customer had been invested. Nothing was disclosed in writing to customers, their SIPP trustees or their financial advisers until 30 May 2019, six months on, and that disclosure referred only to a wider spread without stating the 10% rate. The FCA found this to be a breach of COBS 11.2A.31R.

Customers disinvested £5,784,000 between October 2018 and August 2019, and the firm earned £359,800 from the mark-down.

Three individual customers are set out in the notice. The first, aged 60 at the time of investment and a carer for an elderly parent with an annual income of £4,700, lost £3,590.40. The second, a personal assistant planning to retire within ten years, lost £10,621.46 and had asked the firm directly whether exit charges applied; the response stated that the firm did not apply exit charges and attributed the reduction in value to a wider spread, which the FCA found misrepresented the position. A third customer and their partner had invested all of their pension funds, £20,296, in the model portfolio and had no other savings or investments. After three weeks, the mark-down cost them £702.96.

Concerns about the mark-down were raised internally on nine recorded occasions between 2 November 2018 and 13 February 2019: fairness to customers, double counting of costs, the absence of a workable procedure, the inability to give customers an explanation that could be defended. Mr Hadjigeorgiou did not regard the mark-down as the fairest method and had some sympathy with the concerns, but as chief executive he declined to make a substantive decision about fairness to clients, deferring instead to an assurance from the compliance function that the FCA characterised as unreasonable.

For governance: repeated escalation is not the same as resolution. Where a concern about client fairness comes back more than once, the governance record should show what substantive decision was ultimately taken, by whom and on what basis. A narrower check sits alongside it: whether the charges a firm actually applies match what its client-facing material says they are.

7. How the penalty was calculated, and why it fell

The arithmetic is set out in full and repays reading, because it explains a reduction that might otherwise look like leniency.

Step 1 identified no financial benefit derived directly from the breach, so disgorgement was nil. Step 2 put relevant income from the employment, for the period of the breach, at £282,243, and treated the breach as level 3 on the five level scale. Twenty per cent of that income gave £56,448. The level 4 or 5 factor identified was that the breaches caused significant loss to individual consumers; pulling the other way was the finding that they were committed negligently. Step 3 found no aggravating or mitigating factors applying to a material extent. Step 4 treated the figure as a sufficient deterrent and applied no uplift. No settlement discount applied at Step 5. The result was rounded down to £56,400.

The Decision Notice of 25 April 2024 had recorded £84,600. The difference is explained precisely, and it is not a change in the facts. On further consideration the FCA accepted that the misconduct relating to the introduction of the 10% mark-down should be categorised as a breach of Statement of Principle 6 rather than Statement of Principle 1. Mr Hadjigeorgiou had referred the decision to the Upper Tribunal and, once the parties agreed to resolve the matter, withdrew that reference.

Statement of Principle 1 concerns integrity. Statement of Principle 6 concerns due skill, care and diligence. The same conduct, on the same facts, produced a penalty roughly a third lower depending on which of the two it was found to engage. For anyone assessing enforcement exposure, how conduct is characterised is not a presentational question.

8. What to test in your own file

Six practical checks follow from the findings above.

Rank twice. Order product allocations by size, then by the remuneration each generates for the firm. Where the two orders align, be able to explain why by reference to client outcomes.

Attribute every concentration reduction. Report absolute exposure alongside the percentage, and state whether a fall came from disposal or from growth elsewhere.

Reconstruct the sequence. For a recent product addition, record the date of commitment, the date of any payment received and the date the due diligence file was completed, in that order.

Ask what the listing is doing. Identify where admission to a venue or a rating is standing in for analysis the firm should be performing, and whether the firm assisted in obtaining it.

Reconcile charges to disclosure. Compare the charges applied in practice against the client-facing material, including how they vary by holding period.

Close escalations with decisions. Where a concern about client fairness is raised, the record should show the decision taken, its maker and its date.

9. A note on scope

This article concerns the findings made against Mr Hadjigeorgiou in his Final Notice, which was resolved by agreement under the FCA's executive settlement procedures and has not been the subject of any judicial finding. The Final Notice records that the firm's former head of risk and compliance has referred his Decision Notice to the Upper Tribunal, that any findings in that Decision Notice are provisional, and that he disputes many of the facts and the characterisation of his actions. Nothing here should be read as a finding against him. The Tribunal's decision on that reference will be published on its own website.

SVS Securities Plc was placed into special administration on 5 August 2019 and dissolved on 10 August 2023. The Financial Services Compensation Scheme began considering claims from model portfolio customers on 10 August 2020.

10. Sources

Know what a supervisor looks for in a conflicts and inducements file. Our MiFID II Functional Responsibilities in Asset Management seminar works through conflicts of interest, inducements, due diligence and the responsibilities attaching to senior functions. Target market assessment and distributor obligations under PROD are covered in our Product Governance seminar.

MiFID II Functional Responsibilities in Asset Management
Practical Implementation of Product Governance

This article is provided for general information and professional education purposes only. It reflects publicly available information as at the date of publication and does not constitute legal or compliance advice. Firms should assess their own obligations with reference to their regulatory permissions and, where appropriate, take independent advice.