Significant shortcomings in the organisation and quality of the outsourced compliance function of investment firms, fund management companies and alternative investment fund managers
Through a survey conducted in 2022, the Financial Supervisory Authority (FIN-FSA) gathered information from investment firms, fund management companies and alternative investment fund managers on the organisation and resources of the outsourced compliance function. The survey was answered by 28 supervised entities, namely all of the entities possessing an operating authorisation at the time that had outsourced the compliance function outside the group, either completely or partially.
The purpose of the report was to ascertain how the outsourced compliance function and its tasks are organised, whether sufficient quantitative and qualitative resources have been allocated to the function, and how the outsourced function is monitored. The background to the report is an observation made by the FIN-FSA in its supervision about the prevalence of the outsourcing of the compliance function.
On the grounds of the report FIN-FSA considers that the quality of outsourced compliance function has not been sufficient. All of the supervised entities that participated in the survey had shortcomings in the organisation of the outsourced compliance function.
The most significant findings and shortcomings were:
Shortcomings in the time allocation, resourcing, competence and organisation of the compliance function
- Outsourced compliance officers do not have sufficient time or competence to perform their tasks, as compliance has not performed all of its tasks sufficiently.
- Outsourced compliance is not sufficiently reachable or present in the daily operations of the supervised entities when performing its task. Most of the supervision is done as desk-based exercises.
- Outsourced compliance is not sufficiently present at board meetings where the activities of the compliance function are presented (e.g. risk assessment, monitoring programme, reporting).
- There are shortcomings in the competence of those responsible for compliance.
There is room for improvement in the activities of supervised entities’ boards of directors
- The boards of supervised entities do not sufficiently assess the resourcing and efficiency of the compliance function.
- The boards do not have sufficient competence to assess or question the sufficiency and appropriateness of the function.
The compliance function does not perform all of its tasks as required by regulations
- There are many shortcomings in the content of compliance reporting.
- Compliance activities consist mainly of regulatory reviews for the board of directors and participation in the updating of guidelines. Review and monitoring tasks performed by compliance are either completely or partially absent.
Although the report focuses on outsourcing outside the company or group, the FIN-FSA’s views on the organisation of the compliance function are largely applicable to outsourcing within the group as well as to situations where the compliance function has not been outsourced.
The findings of the FIN-FSA require action from all the entities that participated in the survey, and the FIN-FSA will monitor this. The FIN-FSA requires that other investment firms, fund management companies and alternative investment fund managers also take into account the findings and views raised by the FIN-FSA in its supervisory letter and take the necessary measures.
The FIN-FSA reminds that companies must submit Fit & Proper notifications for both the person responsible for compliance and the company’s outsourced compliance officer. Further information about notifications can be found on the FIN-FSA's website.
For further information, please contact
- Hannele Alanen, Market Supervisor, telephone +358 9 183 5292 or hannele.alanen(at)fiva.fi
- Heidi Tähtinen, Market Supervisor, telephone +358 9 183 5314 or heidi.tahtinen(at)fiva.fi