By Yashoda Fezah, CASS – Compliance Administration & Support Services Limited
Regulatory frameworks today often restrict outsourcing of critical compliance roles, such as Money Laundering Reporting Officers (MLROs) and Compliance Officers. While the intention is to maintain oversight, these constraints increasingly diverge from the realities faced by regulated firms—particularly small and medium-sized enterprises (SMEs). A more risk-based, flexible approach could ensure effective compliance without compromising accountability.
The Compliance Burden vs. Outdated Restrictions
Firms today face growing regulatory demands, yet many lack the internal capacity or expertise to meet them. While outsourcing compliance functions can offer access to seasoned professionals, operational efficiency, and cost control, many regulators prohibit it—requiring in-house appointments regardless of business size or resource constraints.
This raises a fundamental question: Are current rules helping or hindering compliance outcomes?
Compliance Under Pressure: Financial, Operational, and Talent Gaps
- Financial and Resourcing Constraints:
SMEs face significant financial and staffing challenges in building and sustaining effective in-house compliance capabilities:
- Cost-Prohibitive Staffing: Hiring experienced in-house compliance professionals can be financially unsustainable for smaller firms.
- Talent Scarcity: Even firms willing to invest struggle to source qualified professionals in a competitive and limited talent market.
- Risk of Inexperience: To cut costs, firms may appoint junior or underqualified staff, inadvertently increasing exposure to compliance failures and regulatory penalties.
- Operational Risks from “Name-Only” Compliance Officers:
Operational gaps emerge when firms treat compliance roles as formalities rather than functional safeguards:
- Superficial Appointments: Some firms appoint internal staff to meet the letter of the law while outsourcing the actual work. This often leads to fragmented and ineffective compliance structures.
- Accountability Without Expertise: Holding individuals responsible who lack the requisite expertise weakens the compliance framework and fosters a culture of box-ticking rather than true risk management.
A Case for a Risk-Based Outsourcing Framework
At CASS, we advocate for an approach that reflects operational realities. A risk-based model would allow firms to leverage external expertise under defined parameters—ensuring compliance remains strong and transparent.
Without this flexibility, regulations risk driving firms toward unsustainable workarounds that erode compliance integrity. It’s not about reducing oversight—it’s about recognising that a one-size-fits-all approach no longer works.
What a Practical, Risk-Based Model Could Include
A revised compliance outsourcing framework could feature:
- Defined Conditions for Outsourcing: Regulators can set out clear rules under which outsourcing is permitted—preserving accountability while enabling flexibility.
- Approved Third-Party Providers: External compliance specialists can be certified, supervised, and held to regulatory standards.
- Outcome-Focused Oversight: Emphasis should be on the effectiveness of compliance practices, not just organisational form.
This model empowers firms to assess their needs and select the right balance—whether fully in-house, fully outsourced, or hybrid—based on size, risk profile, and resources.
Why the Time to Act is Now
Collaborating with credible compliance partners doesn’t weaken accountability—it strengthens it. Insisting on in-house compliance regardless of context often leads to ineffective solutions and unintended risks.
This is reflected in Thomson Reuters’ 2023 Cost of Compliance report, where 38% of firms reported outsourcing some or all compliance functions—up from 30% in 2022. Their reasons: lack of in-house skills, cost savings, and the need for added assurance.
It’s time to acknowledge that rigid rules around in-house compliance may no longer serve their purpose. A structured, risk-based approach to outsourcing can drive better compliance outcomes, support smaller firms, and maintain regulatory integrity in an evolving landscape.
