The Compliance Officer Dilemma: Internal or External?

In the April 2024 issue of FA News, Kim Garrun, Legal and Compliance Manager, and Mike Frewen, Compliance Consultant at the Garrun Group, discuss the critical decision of whether to employ an internal Compliance Officer or engage with an external compliance practice for Financial Services Providers (FSPs), particularly in light of the regulatory landscape in which FSPs operate.

Section 17 of the Financial Advisory and Intermediary Services (FAIS) Act stipulates that any FSP with one or more key individuals must appoint a Compliance Officer. However, it remains silent on whether this Officer must be internal or external, thereby leaving FSPs grappling with this dilemma.

Internal versus external
Internal Compliance Officers, directly employed by the FSP, face the unique challenge of walking a tightrope between colleagues and enforcers. In addition, they find themselves immersed in the daily hustle and bustle of FSP operations and politics. 
This closeness gives them valuable insights into the organisation’s culture, goals, and management styles. However, it also presents possible pitfalls, as it can blur the lines between their responsibilities and potentially compromise their independence or lead to conflicts of interest. On the other hand, external compliance practices offer a more distant perspective, focusing on retrospective monitoring rather than daily involvement in FSP affairs. They are often chosen by smaller FSPs lacking internal resources or expertise to establish and maintain a dedicated compliance function. Outsourcing compliance can provide access to specialised knowledge and resources. External compliance providers may also offer a broader industry view, drawing insights from their experience working with various clients. However, reliance on external parties can introduce challenges related to communication, responsiveness, and alignment with the FSP’s unique needs and objectives.

A balanced compliance solution
Amidst these considerations, it is essential to distinguish between a compliance function and a Compliance Officer. FSPs have no choice but to establish a compliance function. However, they have a choice in who supervises this function. It may be either an internal or external Compliance Officer (as provided by a compliance practice). Larger FSPs may maintain an internal compliance function while engaging directly with external compliance practices. This hybrid approach allows FSPs to harness the benefits of both internal and external expertise while maintaining an arms-length relationship and independence.

We opt for a hybrid approach, recognising the value of integrating internal knowledge with external insights. This approach combines the best of both worlds, allowing us to leverage the institutional knowledge and proximity of an internal compliance function while also benefiting from the independence of an external Compliance Officer. This provides a comprehensive and balanced compliance solution tailored to our specific needs.

No one-size-fits-all solution
The advantages and disadvantages of each approach depend on various factors, including company size, complexity, and regulatory requirements. Internal Compliance Officers may be more familiar with the organisation’s operations and culture, facilitating effective collaboration with business units. However, they may struggle with resource limitations or conflicts of interest, particularly in enforcing compliance measures. External compliance functions offer specialised expertise and independence but may lack the depth of institutional knowledge and immediate availability of an internal compliance function.

Ultimately, there is no one-size-fits-all solution. FSPs must tailor their compliance approach based on their unique circumstances, strategic objectives, and risk appetite. Whether internal, external, or a hybrid approach, the Compliance Officer’s challenge remains the same: striking a balance between partnership and oversight in a complex regulatory landscape. It is a delicate dance that requires careful consideration of trade-offs, weighing the advantages of proximity and organisational understanding against the benefits of expertise and independence. In navigating this Compliance Officer dilemma, FSPs must find the right structure that best suits their unique circumstances and regulatory obligations.

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