With the Conduct of Financial Institutions (COFI) Bill set to reshape the financial services industry, sole proprietor Financial Services Providers (FSPs) may want to reconsider their business structure. This article explores how converting to a private company, such as a (Pty) Ltd, could offer both regulatory and operational benefits under COFI.
The draft versions of the Conduct of Financial Institutions (COFI) Bill point to a substantial transformation of South Africa’s financial regulatory framework. COFI seeks to promote financial inclusion and embed Treating Customers Fairly (TCF) principles into enforceable law, introducing meaningful changes in licensing, governance and consumer protection.
While the Bill does not explicitly require sole proprietors to change their business structure, it raises several compliance and operational expectations that may challenge the viability of the sole proprietor model. From activity-based licensing and more intensive data reporting, to demonstrating robust governance aligned with TCF, these demands may prove difficult to meet without broader operational support.
That’s why transitioning to a private company is a strategic move worth considering. This structure not only enhances business continuity and succession planning but also better positions FSPs to meet the practical and regulatory demands of COFI.
This evolving landscape offers sole proprietors a valuable opportunity to reflect on their long-term sustainability. By taking strategic steps now, they can not only strengthen compliance readiness but also reinforce their commitment to protecting clients and meeting COFI’s broader objectives.
The regulatory imperative – adapting to COFI and TCF
COFI’s legal enforcement of TCF Outcomes will require FSPs to embed fair treatment of clients into their governance and operational practices. This shift represents a challenge for sole proprietors, who often lack the support structures to meet such expectations.
Additionally, COFI introduces an activity-based licensing model, requiring authorisation for specific financial activities. This, coupled with increased data collection and reporting obligations, may be difficult for one-person operations to manage effectively. Documenting compliance processes and maintaining detailed governance policies could strain capacity.
Although not compulsory, restructuring as a private company allows sole proprietors to demonstrate more robust governance and operational resilience – key expectations under COFI.
The link between COFI, TCF and succession planning
While COFI does not explicitly mandate succession planning, its outcomes-based approach –particularly through the enforcement of TCF – strongly implies its importance. Under the TCF framework, FSPs are expected to ensure continuity of service and the fair treatment of clients throughout the business relationship lifecycle – including having appropriate plans in place to maintain continuity.
In the absence of a succession plan and an appropriate business structure that allows for transfer and continuity, a sole proprietorship may cease operations abruptly in the event of the owner’s death, retirement or incapacity. This disrupts service, potentially compromises client outcomes and may conflict with Section 20 of the General Code of Conduct, which outlines the obligations for the proper termination of business relationships. Sole proprietors may face challenges in fulfilling these duties in unforeseen circumstances, such as sudden incapacity, highlighting the importance of having contingency plans in place.
Therefore, while COFI does not require succession planning, it is a logical and prudent response to the framework’s outcomes-based focus and TCF expectations. Transitioning to a private company enables structured planning for continuity, ensuring that clients remain protected and business obligations are honoured – even in the absence of the original owner.
Strategic benefits of becoming a private company
Moving beyond regulatory compliance, there are several operational and commercial advantages to operating as a private company:
– Limited liability and protection of personal assets
A private company is a separate legal entity from its owners, meaning that shareholders are not personally liable for the company’s debts or legal obligations. This structure offers a layer of protection – often referred to as risk ring-fencing – which helps shield shareholders’ personal assets from business-related financial claims. By contrast, a sole proprietorship does not offer this separation. The owner and the business are considered one and the same, making the individual personally responsible for all debts and obligations. This exposes the owner’s personal estate to potential financial risk.
– Business continuity and succession planning
A private company has a separate legal identity, allowing the appointment of a new Key Individual (KI) without interrupting business operations. Clients can remain under the same FSP licence, with no need to transfer contracts or obtain client consent, preserving goodwill and client trust.
– Retention of client and staff relationships
Employees who have developed close relationships with clients can remain with the business, enhancing client retention and service consistency. This “stickiness” increases the long-term value of the client base and the business.
– Uninterrupted revenue streams
Ongoing income continues to accrue to the entity, even if the original owner exits. In contrast, income in a sole proprietorship typically ceases with the owner’s departure.
– Scalability and professional perception
A private company structure allows for growth through additional shareholders or directors and often presents a more credible image to clients, product suppliers and regulators. It also allows for broader contractual flexibility and easier integration into group structures or succession transactions.
– Streamlined operational efficiency
Private companies can invest in systems, delegate duties and formalise risk management policies – facilitating compliance with COFI’s demands for governance, fairness and transparency.
– Tax benefits for succession planning
Private companies and sole proprietors are taxed differently, and while the full range of benefits and drawbacks falls beyond the scope of this article, tax implications play a key role in succession planning. A sole proprietorship has no legal continuity – when the owner dies or exits, the business ceases to exist. Business assets must be transferred through the estate, potentially triggering capital gains tax and estate duty.
In contrast, a (Pty) Ltd has perpetual succession. Ownership is held via shares, which can be transferred without disrupting the company’s operations or tax obligations. The company continues to operate and is taxed independently, while only the transfer of shares may have tax consequences for the outgoing shareholder.
Planning for transition
Given the implications of COFI and the operational benefits outlined above, it’s worth assessing whether your current structure supports your long-term goals. This is not merely a compliance decision, but a strategic one – one that affects succession, continuity and client protection.
While transitioning from a sole proprietorship to a private company can seem daunting – often viewed as a complex and time-consuming process – it doesn’t have to be. With the right guidance and planning, the shift can be managed effectively.
At Masthead, we’ve helped numerous FSPs across the country navigate this transition smoothly and successfully. With over two decades of experience, our team provides expert support every step of the way – from reviewing your current structure and assessing compliance risks, to developing a tailored conversion plan that aligns your new entity with both COFI’s regulatory expectations and your business objectives.
Engaging a partner with a strong track record in this type of transition can provide valuable support, streamline the process and reduce risk – particularly as the COFI Bill reshapes the compliance landscape.
To find out how Masthead can support your business through this transition, get in touch with us today.