Two Arrangements, Often Confused

Outsourced Compliance Support

Many compliance consultancies offer services such as compliance monitoring, financial promotions review, policy drafting, training and regulatory return preparation. The firm buys the work, and the consultancy delivers it. This is an outsourcing arrangement, and it’s governed by the FCA’s systems and controls rules, in particular the outsourcing requirements in SYSC 8.

The key principle is that a firm can outsource tasks but not responsibility. The firm, its governing body and its Senior Managers remain accountable for compliance, however much of the work is done by someone else. The consultancy doesn’t hold any Senior Manager Function and isn’t approved by the regulator for that purpose.

A Fractional Senior Manager

A fractional Senior Manager is an individual, approved by the regulator, who holds a Senior Manager Function at the firm, such as SMF16 Compliance Oversight or SMF17 MLRO, while working for the firm part-time. They may be self-employed, work through their own company or be supplied by a consultancy, but they hold the function personally. They sign the Statement of Responsibilities, they’re subject to the Senior Manager Conduct Rules, and the Duty of Responsibility applies to them in the same way as to a full-time employee.

The difference matters because the regulator’s questions are different. For outsourced support, it asks whether the firm is overseeing the arrangement properly. For a fractional Senior Manager, it asks whether that person is fit and proper and able to do the job at this firm, with the time they have available.

What the FCA Expects From a Fractional Senior Manager

Genuine Availability

The most common concern with fractional arrangements is time. A compliance officer who works one day a week can be entirely appropriate for a small investment adviser. The same arrangement would be inadequate for a growing lender with thousands of customers. The FCA will want to understand how much time the individual will commit, whether that’s enough for the firm’s size and risks, and what happens when something urgent arises on a day they’re not working for the firm.

A Sensible Number of Roles

Fractional Senior Managers often hold similar roles at several firms. That can bring valuable breadth, but there’s a point at which the individual can’t give each firm adequate attention. The regulator looks at the total commitment, and candidates holding many roles should expect questions. Firms should ask candidates directly about their other commitments and how they manage conflicts between them.

Real Authority Inside the Firm

A fractional Senior Manager needs the same access and authority as an employee in the role would have: access to the board, to management information and to staff, and the standing to challenge decisions. If the arrangement leaves them on the edge of the business, receiving information second-hand, it won’t meet the regulator’s expectations, and it won’t protect the individual either.

Fitness and Propriety

Fractional candidates go through the same approval process as anyone else, assessed against the fit and proper test with regulatory references covering the previous six years. Being experienced doesn’t exempt anyone from the process, and the timetable is the same.

What the FCA Expects From Outsourced Support

Where a firm uses a consultancy for compliance tasks, the FCA expects it to manage the arrangement like any other material outsourcing. That means:

• choosing a provider with the right expertise for the firm’s business and permissions
• agreeing a clear written contract setting out the services, standards and reporting
• having someone inside the firm, usually the relevant Senior Manager, who understands the work well enough to oversee it and challenge it
• making sure the firm can still meet its obligations if the arrangement ends.

The weakness in many small-firm arrangements is the third point. If nobody inside the firm understands the compliance monitoring reports well enough to act on them, the outsourcing isn’t really being overseen. The SYSC sourcebook is clear that responsibility stays with the firm.

Choosing the Right Arrangement

When Outsourced Support Is Enough

Outsourced support works well alongside a capable in-house Senior Manager. A small firm whose chief executive or an executive director holds compliance oversight, and who has the knowledge to direct and challenge the consultancy, can use outside help efficiently for monitoring, training and specialist reviews. It’s also useful for larger firms needing extra capacity or specialist expertise, for example in financial promotions or a new product area.

When a Fractional Senior Manager Is Better

A fractional Senior Manager is usually the better choice where nobody in the firm has the experience to hold the function credibly. That’s common at newly authorised firms, fast-growing firms whose founders come from outside regulated financial services, and firms where the previous holder has left unexpectedly. Our page on fractional and interim SMF cover explains how we structure these appointments.

When It’s Time for a Full-Time Appointment

The trigger is usually scale or risk. When the firm’s customer numbers, product range or regulatory attention grow to the point where compliance needs daily leadership, a fractional arrangement starts to struggle. Many firms plan a transition from fractional to full-time over twelve to eighteen months, sometimes with the fractional holder helping to recruit and hand over to their successor.

Combining the Two

Many firms use both. A fractional SMF16 and SMF17 provides the accountable senior oversight, while a consultancy or junior in-house team handles day-to-day monitoring and administration. This can be the most cost-effective model for a smaller firm, provided the roles are clearly defined and the fractional Senior Manager has genuine oversight of the outsourced work.

The fractional model is well established in finance leadership, where part-time finance directors and CFOs have long supported growing businesses. Our sister practice FD Capital has placed fractional and interim finance leaders since 2018, and many of the same principles apply to compliance: clear scope, realistic time commitment, and genuine access to the board.

Questions to Ask Before You Decide

• Who inside the firm will be accountable to the regulator for compliance and for financial crime?
• Does that person have the experience to hold the function credibly, and to oversee any outsourced work?
• How much time does the role genuinely need each week, and what happens when something urgent comes up?
• How many other roles does any external candidate hold, and how will conflicts be managed?
• What’s the plan as the firm grows, and when would a full-time appointment be needed?

Clear answers to these questions usually point to the right arrangement. If they don’t, a governance and SMF structure review can help clarify who should hold what.

The Bottom Line

Outsourced compliance support and fractional Senior Managers are both legitimate, and both can serve smaller firms well. But they aren’t interchangeable. One buys work, the other appoints an accountable individual. Firms that are clear about the difference, and choose the arrangement that fits their size and risks, avoid the most common supervisory concern about small-firm compliance: that nobody inside the business is really in charge of it.