For many small financial services providers, the passing of the owner can create a crisis that threatens the existence of the business. In most cases, the owner is not only the sole shareholder, director, or member of a close corporation but also the only key individual responsible for regulatory compliance and oversight.
Although succession plans often assume that a spouse or child will inherit the business and either continue its operations or rely on it as a source of income, this is rarely a practical reality. Regulatory requirements, particularly the need for a qualified key individual, create significant obstacles that many heirs are unprepared to navigate.
Additionally, when the deceased was the only director, the company is left leaderless, and the business may be forced into a holding pattern while the estate is settled – often leading to a loss of clients and revenue.
Key individual requirement
In terms of the Financial Advisory and Intermediary Services Act, an FSP must have a key individual to remain authorised and render financial services (section 8(1A)).
The definition of “key individual” in the Act states that where the FSP consists of a single director, shareholder, or trustee, that person is automatically the key individual.
And this is where the problem arises when it comes to succession planning. The FSP may appoint other key individuals within a certain period after the key individual has passed. However, the new shareholder, director, or member must meet the requirements ascribed to a key individual.
Challenge of transferring ownership
When ownership is transferred to a beneficiary, the beneficiary usually does not meet the do not meet the fit and proper requirements. This can prevent the FSP from continuing operations, rendering any succession plan ineffective.
A possible solution is to avoid leaving 100% of the business to a single beneficiary. Instead, dividing ownership between a spouse, child, or testamentary trust – even in a 99/1 split –prevents the new owner from automatically needing to be a key individual.
However, the issue extends beyond key individual status. If the deceased was the only director, the company is left without someone to make decisions. In such cases, the executor assumes control, but executors are generally not in the business of managing FSPs. Additionally, executors cannot act until they receive formal appointment from the Master of the High Court, which can take weeks or months.
During this waiting period, the business is in limbo. Clients may seek alternative service providers, and the FSP risks losing both income and value – undermining the intention for it to provide an income for the deceased’s beneficiaries.
Ensuring business continuity
To prevent disruption, an FSP should have more than one director capable of managing operations after the owner’s passing. This allows the business to continue functioning while the deceased’s shareholding is settled in terms of testamentary provisions.
Sole owners of FSPs should ask themselves:
- “Will my company be able to continue operating if I suddenly passed away?” Consider whether your board structure supports a smooth transition. Remember that beneficiaries cannot nominate new directors until they become owners of the shares. This will occur only when the estate has been finalised, which could take from nine months to three years.
- “Is my bequest practical?” Consider whether your testamentary provisions align with statutory requirements for a key individual. Will your succession plan ensure that the FSP can operate seamlessly while the estate is being finalised?
Special considerations for sole proprietors
In the case of a sole proprietor business structure, there is no distinction between the individual person and their business activities. A sole proprietor business structure does not have a key individual. When the owner dies, the FSP automatically lapses (section 11). This makes succession planning even more critical. Sole proprietors must take proactive steps during their lifetime to ensure their business’s financial future.
Billy Seyffert is the chief operating officer of Moonstone Compliance.
Disclaimer: The information in this article does not constitute estate planning or legal advice that is appropriate for every individual’s needs and circumstances.
