I would say that they are used to replace names. Maybe M=Mary and S= Steve e.g. Mary told Steve that he's got loads of..... It depends on the context, what came before, what comes after.
You are right but i should say we need a context. Who is he? We would need to know who they are talking about. or Mary told Steve she's got loads of...
Woodward - I don't think they are used to replace names (there are no such names in the context, and I'm not sure the context really helps.) The phrase is used in the following notes made by a club secretary.
NOTES
Write to all members to make them feel at home and to give them the latest details about all the activities coming up soon.
Having investigated further, I discovered that letters are used to replace names to protect the identities of the people involved in court cases
Evidence presented at trial tended to show that defendant was married to his third wife, and had a child from each of his priortwo marriages. Defendant's daughter (herein “M”) was born on 26 March 1983; his son (herein “S”) was born 29 August 1
There is no rule. It can be a random letter or the first letter of the name. It's not used much as it is often confusing. Usually in court cases to avoid releasing the true identity of the victim or the person accused of the crime. V is just a random letter that appears in a true court case transcript.