Discover how outsourcing the compliance function can drive efficiency without compromising accountability, learn the risks, controls, and best practices for effective third-party compliance management.
As regulatory expectations continue to intensify and compliance costs rise, organizations are increasingly considering outsourcing parts of their compliance function. While once a controversial concept, outsourcing is now seen by many as a viable strategy to maintain robust compliance while managing operational costs and enhancing flexibility. This white paper explores the strategic rationale, benefits, challenges, and best practices related to outsourcing compliance, with the goal of helping firms make informed decisions in a dynamic regulatory environment.
The Evolving Role of the Compliance Function
The compliance function, although not directly responsible for generating revenue, plays an essential role in risk management and strategic execution. It ensures that the organization operates within the regulatory frameworks that govern its activities, and helps build resilience and trust among stakeholders. When compliance activities are outsourced, it is critical to remember that the ultimate accountability for meeting regulatory obligations still rests with the organization itself.
Compliance Outlook: A Growing Burden
Surveys of compliance professionals reveal an increasing burden on compliance departments. A majority expect rising costs associated with hiring and retaining senior compliance staff, as well as overall growth in compliance budgets. There is also a clear trend toward more regulatory information to process and greater time commitments needed for interactions with regulators. These trends signal the need for scalable, efficient compliance operations that can keep up with expanding regulatory demands.
Changes in Operational Risk Capital Calculations
The regulatory environment has also evolved in how it calculates operational risk capital. Earlier models under Basel II and III, such as the Basic Indicator Approach, the Standardized Approach, and the Advanced Measurement Approach, have been replaced post-2015 by the Standardized Measurement Approach. This newer approach considers not just gross income but also specific expenses in the capital charge calculation, further emphasizing the need for precise and reliable compliance processes.
Why Outsourcing Was Traditionally Taboo
Despite its advantages, outsourcing compliance has faced resistance. Historically, compliance was considered a function best handled internally. Concerns ranged from a perceived lack of third-party expertise and accountability, to fears over data confidentiality and the potential for regulatory penalties due to errors in reporting. Cultural inertia and a strong sense of ownership over compliance activities also contributed to the reluctance to outsource.
When to Consider Outsourcing
Organizations should consider outsourcing when they face challenges in managing increasing workloads caused by expanding regulatory requirements, when the Chief Compliance Officer lacks the strategic bandwidth to contribute to broader business goals, or when there is a need to enhance the compliance team’s efficiency. Other considerations include inadequate IT infrastructure or disproportionate cost increases as the organization grows.
What Compliance Functions Are Suitable for Outsourcing?
Certain routine and non-strategic tasks within the compliance function are more suitable for outsourcing. These include the collection of compliance data, assistance with internal and external reporting, testing and monitoring of business systems for compliance adherence, and conducting trend analysis and predictive modeling to support compliance operations.
Benefits of Outsourcing Compliance
Outsourcing can provide access to skilled talent with a combination of regulatory expertise, operations knowledge, and analytical capabilities. It helps mitigate issues such as high staff turnover, training costs, and the difficulty of keeping staff updated with new regulations. Providers often bring more regulatory knowledge than any single internal hire, and offer deeper team knowledge not limited to a single firm’s context. They also bring industry-wide insights and continuity of service despite employee changes. Outsourced teams often require less ramp-up time and can contribute value immediately. Independence is another advantage, as third-party reviews may carry more credibility with regulators and senior management. From a cost perspective, outsourcing can be more economical than maintaining a full in-house compliance team, especially when factoring in benefits and staffing overhead. Moreover, some contracts allow liability sharing with the provider in case of compliance failures, which adds another layer of protection. Importantly, regulators may view outsourcing as a sign that the firm takes compliance seriously, provided it is done with proper governance.
Risks of Outsourcing Compliance
Outsourcing is not without risks. Chief among them is the threat to data security. This includes the potential loss of intellectual property, leakage of strategic or customer data, and the risk that sensitive regulatory information could be misused or fall into the hands of competitors. These risks necessitate a strong risk management and governance framework.
Managing Data Security Risks
To manage data-related risks, organizations should thoroughly understand their provider’s business processes and the technology platforms used to deliver the service. A comprehensive review of both the provider’s and the client’s systems should be conducted to identify any gaps in expectations or interoperability. It is also essential to assess the provider’s processes for maintaining accurate inventories of technology and subcontractors. Additionally, the provider’s change management protocols should be reviewed to ensure appropriate segregation of duties and accountability, and performance metrics should be clearly defined and aligned with the organization’s expectations.
Managing Accountability Risks
Accountability risks must be addressed by evaluating the provider’s risk management program, including its internal policies, processes, and controls. The effectiveness of the provider’s internal audit function should be examined, particularly whether it can independently and reliably test and report on internal controls. Lastly, organizations must ensure that the provider has clear procedures in place for escalating issues, implementing remediation, and holding management accountable for deficiencies identified during audits or independent reviews.
Outsourcing the compliance function, when approached with caution and strategic intent, can be a powerful way to improve organizational agility and reduce costs, without compromising on regulatory adherence. Rather than being a taboo, it is increasingly viewed as a mark of maturity—provided that core responsibilities remain in-house and that the organization maintains robust oversight over the outsourced functions. With the right governance, outsourcing can enable organizations to focus on their core business while ensuring their compliance framework evolves to meet modern challenges.