Background

As we occasionally become involved with issues relating to sole director firms, this Bulletin seeks to highlight some of the hidden governance risks that may arise and our guidance to help mitigate those risks.

In the early stages of a business, a sole director can seem sensible – decisions are quicker, accountability is clear and costs are lower. Many successful firms start with a highly capable, experienced, and committed founder, wearing multiple hats and driving growth. The issue is not capability, but rather that capability is not the same as resilience.

Although FCA rules do not require every regulated firm to have multiple directors, expectations around outcomes, governance and operational resilience are increasing. The key question is whether the business can manage its risks and responsibilities sustainably, when so much depends on one individual.

Resource risk: the limits of one individual

In an FCA-regulated business, a director’s responsibilities go far beyond commercial leadership. They include governance, regulatory compliance, operational resilience, financial and risk management, customer outcomes, and strategic direction.

Even the most capable director has limited capacity. Where one person is responsible for all key decisions, regulatory engagement, governance and strategy, dependency becomes built into the business model and resilience is only truly tested when the unexpected happens.

This begs the uncomfortable question for sole directors: “What happens if I’m not there tomorrow?”

Unexpected absence can arise from illness, incapacity, bereavement, family emergencies, or extended leave, but continuity can also be tested during operational incidents or regulatory interaction. The absence of a second director often means there is no immediate successor or authorised individual capable of stepping into the role, so:

• How would the business continue its day-to-day functions and continue to service its customers?
• How would bank accounts be managed/sign off provided, where required?
• How would key decisions be made?
• Who would provide oversight and challenge?
• How would regulatory responsibilities continue uninterrupted?
• How would the firm meet its legal obligations?
• How would a new director be appointed?

For many firms this could create significant issues, expose key relationships, and leave customers, employees and stakeholders left wondering who is actually in charge. This is not simply inconvenience; it can create genuine operational, legal, and regulatory risk.

Operational resilience starts at the top

Operational resilience is now a key regulatory focus, with firms investing in technology, cybersecurity, outsourcing, and continuity planning. Yet many still overlook leadership as the biggest single point of failure.

True resilience requires organisations to consider ‘people risk’ with the same rigour applied to operational risk, because resilience is not measured by how much one person can carry; it is measured by whether a business can continue to thrive or even function when a key or sole director is incapacitated.

Adding a second or further additional directors should not be viewed as a regulatory burden but rather an investment in resilience. An additional director can provide independent challenge, broader expertise, and greater decision-making capacity, resulting in improved governance and enhanced stakeholder confidence.

For many firms, the move from a sole director model to a broader leadership structure marks an important stage of organisational maturity.  It is not, however, always immediately practical for smaller firms, and in these cases a well-structured locum arrangement can provide valuable resilience.

Whether through an existing member of staff, an experienced consultant, a retained compliance professional, a Non-Executive Director or another suitably qualified individual, firms can establish pre-agreed arrangements that can be activated if a sole director becomes unexpectedly unavailable, leaving the business in a safe pair of hands.

The benefits are significant:

• continuity of regulatory engagement and communications;
• support for critical business decisions during periods of absence;
• independent oversight during operational incidents;
• reduced key person dependency; and
• greater confidence for employees, customers, and regulators

Locum arrangements are not a substitute for succession planning or strong governance. They are, however, a practical, proportionate way to address a risk many small firms recognise but few formally prepare for.  They demonstrate an acknowledgement that operational resilience extends beyond systems and processes to leadership.

If a firm is a sole advisor business, the risks increase and, in this scenario, a locum arrangement would be an FCA authorised person or company that can step in when needed, to help run the business and look after customers.

When setting up a locum agreement, succession or continuity planning, contracts and/or other legal documents should be in place to set out the terms, scope of interim arrangements and future contingency plans.

Governance Risk: Who challenges the challenge

The phrase ‘key person risk’ often gets treated as an HR concern. In reality, it is a governance issue because if one individual is responsible for all the critical decisions, risks, and strategy, the business is not resilient, it is dependent. The FCA has consistently emphasised the importance of effective governance arrangements and one of the most overlooked weaknesses of a sole director structure is the absence of meaningful challenge.

Governance is strengthened when decisions are subject to scrutiny from individuals with different perspectives and experiences; in fact, a sole director structure can unintentionally create governance blind spots, for example:

• Strategic decisions may go unchallenged.
• Emerging risks may not be identified early enough.
• Groupthink or blinkered views can develop even when unintentional.
• Significant decisions may lack independent review.
• Regulatory obligations can become concentrated on one individual.

The most effective boards are rarely those where everyone agrees, they are the ones where healthy debate improves outcomes. Businesses do not become weaker because someone asks difficult questions, but poor business decisions happen when nobody does. Additional directors can introduce an additional layer of oversight, challenge and accountability that benefits both the business and its customers.

The appointment of a second director, however, is rarely simple. A suitable director must bring the right combination of skills, judgement, commercial understanding, independence of thought and cultural fit. Such an appointment will also represent a significant financial commitment for the business in terms of remuneration and ongoing costs.

Some solo directors counter this by using a ‘critical friend’ approach, working with another authorised firm or experienced consultant who can provide constructive challenge without the commitment of a permanent board appointment. An external adviser can test assumptions, highlight emerging risks, and offer an objective perspective where one decision-maker dominates.

This does not replace director accountability, but it can be a practical way to strengthen risk assessment and decision-making by providing independent challenge and keeping focus on customer outcomes.

Succession Planning: The risk nobody wants to discuss

Succession planning is often viewed as a large corporate issue, but it can be even more critical for smaller regulated firms. Every business will face leadership transition; the only uncertainty is when. A plan is most effective before it is needed, and helps reduce the operational and regulatory risks as well as the impact on customers.

Without a credible transition plan, the firm risks disruption, delayed strategy and regulatory concern which can ultimately result in customer uncertainty, staff retention issues, and reduced valuation.

Investors, acquirers, and regulators increasingly assess whether leadership continuity is embedded within a firm’s operating model. A business with broader leadership structure often carries less perceived risk, and the strategic question is then perhaps less ‘who can step in temporarily’ and more ‘who could ultimately assume greater responsibility within the business over time?’

Many firms have talented individuals within their organisation who have the potential to become future leaders. What they often lack is the structured development, mentoring and exposure needed to prepare them for governance and leadership responsibilities. This is where external support can play a key role, to provide mentoring, governance coaching, and leadership development to build internal capability, identify potential successors and document succession plans, while helping emerging leaders strengthen their skills, regulatory understanding, and board exposure.

The result is not simply a succession plan sitting in a drawer. It is a gradual transfer of knowledge, responsibility, and leadership confidence. Firms that invest in developing future leaders today are likely to be far better positioned to meet the governance challenges of tomorrow.

Sole Traders: Additional Risks

Although more uncommon these days, if a firm is established as a sole trader, rather than a limited company, the risks outlined above are further increased.

A sole trader is a self-employed individual who runs their own business; they may have staff, but the business is not legally separate from the individual. In terms of the FCA, it is the individual who is approved and who is ‘the firm’. Therefore, if anything were to happen to the sole trader, where they could no longer continue in the business, the business would need to cease to trade.

If the sole trader ever wished to sell the business, it could only sell the book of business, and the sole trader would need to apply to the FCA to deauthorise. Where firms have staff, and to help protect customers, sole traders may wish to apply for a change of legal status, to become a limited company, which in effect follows the same processes as a new authorisation.

Conclusion

Some sole director firms resist appointing another director through fear of losing control, but a leader who builds the foundation to ensure leadership resilience demonstrates confidence, good governance, and foresight.

Firms that attract investment, higher valuations and regulator confidence are rarely built around one person; they have sustainable governance that can withstand leadership change.