Outsourced Compliance Officer: An SMF16 Without a Full-Time Hire

Welcome to the SMF Capital podcast.

Today we're looking at a question increasingly being asked by smaller and growing FCA-regulated firms:

Do you need a full-time Compliance Officer, or could an outsourced or fractional Compliance Officer provide the right solution?

SMF Capital has produced a detailed guide to outsourced Compliance Officers:

Outsourced Compliance Officer – SMF Capital

For many smaller regulated firms, a full-time senior compliance appointment may not be necessary. But that does not mean the firm's compliance responsibilities disappear.

The challenge is finding the right balance between cost, expertise, independence and regulatory accountability.

What Does "Outsourced Compliance Officer" Actually Mean?

This is where an important distinction needs to be made.

A firm can outsource compliance work such as monitoring, file reviews, policy development and regulatory advice.

But that is not necessarily the same thing as having an outsourced Compliance Officer.

Under the Senior Managers and Certification Regime, the SMF16 Compliance Oversight function must be held by an appropriately approved individual.

A consultancy itself cannot simply become the accountable SMF16.

There needs to be a named individual who holds the responsibility.

That individual could work for a consultancy, or could be engaged directly on a fractional basis.

This distinction is extremely important for firms considering outsourced compliance.

Why Would a Firm Choose a Fractional Compliance Officer?

For a small FCA-regulated business, employing a senior Compliance Officer five days a week may not make commercial sense.

The firm may have a relatively small number of customers, straightforward operations and limited regulatory complexity.

But it still needs proper compliance oversight.

Someone needs to oversee the compliance monitoring programme, review breaches and complaints, keep policies current, consider regulatory developments and report to the board.

A fractional Compliance Officer can provide that senior expertise for a defined number of days each month.

The arrangement can therefore be proportionate to the size and risk profile of the business.

It can also give the firm access to someone with considerably more experience than it might otherwise be able to afford on a full-time basis.

Who Uses Outsourced Compliance Officers?

There are several situations where this model can work particularly well.

Small directly authorised firms may need an experienced SMF16 without requiring a full-time appointment.

A firm applying for FCA authorisation may need a named Compliance Officer as part of its regulatory structure.

A payments, e-money or crypto business in its early years may need specialist compliance leadership while it develops.

Investment managers and family offices with relatively small regulated operations may also benefit.

And an established firm that has suddenly lost its Compliance Officer may need interim or fractional cover while recruiting permanently.

In some smaller businesses, the same person may also hold the SMF17 MLRO function, provided they have the necessary experience, approval and capacity.

What Should You Look For?

Choosing an outsourced Compliance Officer should not simply be a matter of finding the cheapest available option.

The individual's previous experience matters.

Have they actually held SMF16 before?

Have they worked with firms operating under the same regulatory framework?

Do they understand the firm's particular sector?

An insurance broker, for example, needs different expertise from a payments business.

An investment manager has different compliance risks from a consumer credit lender.

Time commitment is also important.

A Compliance Officer may be working with several businesses.

The firm needs to establish how many days they will dedicate to its work, how quickly they can respond to urgent issues and what happens when they are unavailable.

The individual should also have appropriate access to the board and the information required to perform the function effectively.

Finally, there should be a clear agreement covering responsibilities, confidentiality, conflicts, access, time commitment and arrangements for cover.

What Should an Outsourced Compliance Officer Do?

A genuine outsourced Compliance Officer should be actively involved in the firm's compliance framework.

That can include overseeing the compliance monitoring programme and following up findings.

They may review complaints, breaches and incidents and determine whether matters require escalation.

They may approve financial promotions and review customer communications.

They should keep policies and procedures aligned with regulatory developments.

Consumer Duty information and customer outcomes may also need to be reviewed.

The Compliance Officer should report to the board and attend relevant meetings, while also ensuring that the firm can demonstrate effective compliance oversight.

The important point is that the arrangement should produce evidence that the function is actually operating.

Simply having a consultancy agreement on file is not enough.

Independence Is Important

One advantage of an external or fractional Compliance Officer can be independence.

In a small company, directors are often heavily involved in commercial activity.

It can be difficult for an internal employee who reports directly to those directors to challenge decisions effectively.

An experienced Compliance Officer should be prepared to provide constructive challenge.

That might mean questioning a financial promotion, identifying weaknesses in a monitoring programme or escalating a regulatory concern.

The objective is not to obstruct the business.

It is to ensure that commercial growth takes place within an appropriate regulatory framework.

Outsourced Compliance Support vs SMF16

This is probably the most important point for firms considering outsourcing.

A consultancy can provide valuable compliance support without providing the firm's actual SMF16.

For example, an external consultancy might carry out compliance monitoring while a director within the firm remains responsible for the compliance oversight function.

Alternatively, the firm can appoint a named fractional Compliance Officer who is approved as SMF16, with a consultancy providing additional support around that person.

Those are different arrangements.

Businesses need to understand exactly which model they are buying.

When Should You Bring Compliance In-House?

An outsourced Compliance Officer can work for many firms for a considerable period.

But the arrangement should be reviewed as the business grows.

Increasing customer numbers, higher complaint volumes, new products, additional regulatory permissions or greater regulatory complexity may eventually justify a full-time appointment.

A firm may then move to an internal Compliance Officer while continuing to use external specialists for particular reviews or projects.

The important thing is to ensure that the compliance structure evolves with the business.

Why Use a Specialist Recruitment Firm?

Finding an outsourced Compliance Officer is not simply about finding someone available for a few days a month.

The person needs the right regulatory experience, sector knowledge and approval history.

They need to have sufficient capacity to give the firm proper attention.

They also need to be comfortable operating at board level and challenging senior management when necessary.

This is where specialist recruitment can be particularly useful.

SMF Capital focuses specifically on Senior Management Function recruitment and understands the difference between general compliance support and an individual who can take on the SMF16 responsibility.

The search can be built around the firm's sector, permissions, risk profile, required time commitment and longer-term plans.

Final Thoughts

For many smaller FCA-regulated firms, the choice does not have to be between employing a full-time Compliance Officer and trying to manage compliance internally.

A properly structured fractional or outsourced Compliance Officer can provide experienced senior oversight without the cost of a full-time appointment.

But firms need to understand exactly what they are buying.

Outsourcing compliance tasks is not the same as appointing an approved individual to hold SMF16.

The right Compliance Officer needs the appropriate experience, authority, independence and time to perform the function properly.

If your firm is considering an outsourced Compliance Officer, fractional SMF16 or interim compliance arrangement, the SMF Capital guide provides a useful starting point.

Read the full Outsourced Compliance Officer guide

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