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Compliance Monitoring Explained: A Complete Guide for FCA-Regulated Firms

Compliance monitoring is how a regulated firm checks that it is actually doing what its policies, procedures and the FCA’s rules say it should. It is the compliance function’s core activity: a planned, risk-based programme of reviews and tests that finds problems before customers, auditors or the regulator do. Done well, it gives the board real assurance and the compliance officer a clear view of where the firm stands. Done badly, it produces a clean report that misses the issues that matter. This guide explains what compliance monitoring is, what the rules require, how to build and run a monitoring programme, how to report it, and who you need to deliver it.

What Is Compliance Monitoring?

Compliance monitoring is the systematic, ongoing review of a firm’s activities to check that they comply with regulatory requirements and the firm’s own policies, and that the controls designed to keep it compliant are working. It answers three questions:

  • Are we doing what we say we do? Do day-to-day activities follow the firm’s policies and procedures?
  • Do our controls work? Are the checks and safeguards operating effectively in practice, not just on paper?
  • Are customers getting good outcomes? Particularly since the Consumer Duty, are the firm’s products, services and communications delivering the outcomes the rules require?

Monitoring is different from advice. The compliance function advises the business on what the rules require and how to meet them; monitoring then tests whether the business has done so. Most compliance functions do both, and the balance between them is one of the main decisions in designing the function.

It is also different from a one-off review. Compliance monitoring is a programme: a plan covering the whole year, built from a risk assessment, carried out in a structured way, and reported regularly to senior management and the board.

What the Rules Require

There is no single rule headed “compliance monitoring”, but the obligation runs through the FCA Handbook and related legislation.

SourceWhat it requiresApplies to
SYSC 6.1Adequate policies and procedures to ensure compliance, and (for common platform firms) a permanent, effective and independent compliance function that monitors and regularly assesses the adequacy and effectiveness of the firm’s measuresAll firms (the detail varies by firm type)
MiFID Org Regulation, Article 22A risk-based monitoring programme that takes into account all areas of the firm’s investment services and activities, with reporting to the management body at least annuallyMiFID investment firms
Consumer Duty (PRIN 2A)Firms must monitor and regularly review the outcomes customers receive, identify where outcomes are poor and act on it, with an annual board reportFirms dealing with retail customers
Sector rulesSpecific monitoring expectations in areas such as financial promotions, complaints handling, client money and product governanceDepends on permissions
Senior Managers regimeThe SMF16 compliance officer is accountable for compliance oversight, and the Duty of Responsibility means they must take reasonable steps, which in practice includes effective monitoringFirms with an SMF16

The common thread is proportionality. A small advice firm isn’t expected to run the monitoring programme of a bank, but it is expected to have a plan, carry it out, record what it finds and act on it. The FCA’s Consumer Duty pages make clear that monitoring customer outcomes is now a central expectation for retail firms. Our guide to the Duty of Responsibility explains why effective monitoring matters personally to the compliance officer.

Where Monitoring Sits: The Three Lines

Most firms organise their controls around three lines. Compliance monitoring is a second-line activity, and it works best when everyone is clear where its role starts and stops.

LineWhoRole in monitoring
First lineThe business: advisers, operations, customer service, salesOwns the risks and runs day-to-day controls, including first-line quality assurance (QA) such as file checks and call reviews
Second lineCompliance (and risk)Sets standards, advises, and independently monitors whether the first line’s controls work and the firm is compliant
Third lineInternal auditProvides independent assurance over the whole control framework, including the compliance function itself

In smaller firms, the lines blur. A compliance officer may do first-line file checks as well as second-line monitoring, and there may be no internal audit function at all. That is acceptable if it is proportionate and recognised, but the firm should be honest about the limits of independence when the same person designs, operates and tests a control.

Monitoring, QA and audit: what’s the difference?

First-line QA checks individual cases as part of the process, often before or shortly after the event. Second-line compliance monitoring looks across the business at whether the framework of controls is working, often thematically. Internal audit assesses the effectiveness of governance, risk management and controls as a whole, including whether the compliance function is doing its job. A good monitoring programme uses first-line QA results as evidence, but doesn’t simply repeat them.

Building a Risk-Based Compliance Monitoring Programme

The FCA expects monitoring to be risk-based: effort should go where the risk of harm or breach is greatest, not spread evenly across everything. Building the programme follows a consistent sequence.

  • Define the compliance universe. List the firm’s regulated activities, products, customer types, distribution channels and the regulatory obligations that attach to each.
  • Assess the risk in each area. Consider the inherent risk (likelihood and impact of non-compliance or customer harm), the strength of the controls, and evidence such as complaints, breaches, previous findings, audit results and regulatory focus.
  • Prioritise. Rank the areas by residual risk. High-risk areas are reviewed more often and in more depth.
  • Set frequency and scope. Decide how often each area is reviewed (for example quarterly, half-yearly, annually or on a rolling cycle) and what each review covers.
  • Plan the resource. Estimate the days each review needs and compare the total with the people available. If they don’t match, either add resource or make explicit, documented choices about what won’t be covered.
  • Get the plan approved. The board or its risk or audit committee should approve the plan, usually annually, and see any material changes during the year.
  • Keep it live. Revisit the plan when the business changes, new rules arrive, or monitoring finds problems that suggest wider risk.

The plan itself, and what the board should expect to see in it, is covered in our guide to the compliance monitoring plan.

What to Monitor: Typical Areas by Firm Type

Every firm’s universe is different, but some areas appear in almost every programme, and each sector has its own priorities.

Firm typeTypical monitoring priorities
Financial advice and wealthSuitability of advice, ongoing advice and fees, vulnerable clients, fair value, financial promotions, client money, complaints
Investment managers and brokersBest execution, conflicts of interest, personal account dealing, market abuse surveillance, client categorisation, CASS, inducements
Consumer credit and lendingAffordability and creditworthiness, forbearance and arrears handling, vulnerable customers, financial promotions, complaints, Consumer Duty outcomes
Insurance and insurance distributionProduct governance and fair value, claims handling, renewals pricing, appointed representative oversight, complaints
Payments and e-moneySafeguarding, onboarding and due diligence, complaints, fraud and reimbursement, financial promotions, outsourcing and agent oversight
Cryptoasset firmsFinancial promotions, customer onboarding and appropriateness, financial crime controls, complaints, disclosures

Cross-cutting areas usually include complaints handling, financial promotions, the treatment of vulnerable customers, record keeping, training and competence, conflicts of interest, outsourcing oversight and regulatory reporting. Financial crime monitoring may sit within the compliance programme or with the MLRO; either way it needs to be covered (see below).

How to Test: Monitoring Methods

A good programme uses a mix of methods, chosen for what each review needs to establish.

MethodWhat it involvesBest for
Desk-based reviewReviewing policies, procedures, MI and records against requirementsChecking design and documentation
File reviewsExamining a sample of customer files or transactions in detailAdvice suitability, onboarding, lending decisions, claims
Call and chat listeningReviewing recorded interactions with customersSales conduct, complaints handling, vulnerable customers
Walkthroughs and interviewsFollowing a process end to end with the people who run itUnderstanding how controls really operate
Control testingTesting whether a specific control operated as designed over a periodReconciliations, approvals, sign-offs
Thematic reviewsLooking at one issue across the whole businessConsumer Duty outcomes, fair value, emerging risks
Data analyticsAnalysing full data sets for patterns and outliersPricing, arrears, complaints trends, product outcomes
Mystery shoppingPosing as a customer to test the experienceSales processes and customer communications

Sampling

Most reviews test a sample rather than every case. The sample should be large enough to support a conclusion and chosen in a way that reflects the risk: random samples for a general view, targeted samples for higher-risk cases (new advisers, complex products, vulnerable customers, large values). Record how the sample was chosen and why, because the robustness of the conclusion depends on it. Where data allows, analytics across the whole population is increasingly used to target samples more intelligently.

Findings, Ratings and Actions

Monitoring is only useful if what it finds leads to change. Each review should produce a short report with clear findings, a rating, agreed actions, owners and deadlines.

RatingTypical meaningTypical response
HighSignificant risk of customer harm or regulatory breach; control failing or absentImmediate escalation to senior management; urgent remediation; consider breach reporting and customer redress
MediumControl weakness that could lead to harm or breach if not addressedAgreed action plan with a defined deadline, tracked to completion
LowMinor weakness or improvement opportunityAction at the business’s discretion, monitored

Three disciplines separate effective programmes from weak ones:

  • Root cause, not symptoms. A finding should explain why the problem happened, so the fix prevents recurrence.
  • Tracking to closure. Actions are logged, chased and reported until complete, with overdue actions escalated.
  • Validation. Compliance re-tests closed high and medium actions to confirm the fix actually works, rather than accepting the business’s word.

Some findings will need more than an action plan. Where monitoring identifies a breach, the firm must consider whether it needs to notify the FCA, and where customers have suffered harm, whether redress is due. Those decisions should be documented, with the compliance officer’s advice recorded.

Reporting Compliance Monitoring to the Board

The board needs a clear, honest picture, not a list of every test performed. Good compliance monitoring reporting typically includes:

  • progress against the approved plan, with reasons for any slippage;
  • key findings and their ratings, focusing on what matters most;
  • themes across reviews, such as a recurring weakness in record keeping;
  • the status of open actions, especially overdue high-rated ones;
  • Consumer Duty outcome data and what it shows; and
  • any resource constraints that mean the plan can’t be delivered as approved.

For MiFID investment firms, reporting to the management body must happen at least annually; most firms report quarterly, with a fuller annual compliance report. Our guide to what the board should see from its SMF16 goes into board reporting in detail, and the annual MLRO report is its financial crime equivalent.

Monitoring Consumer Duty Outcomes

The Consumer Duty changed compliance monitoring for retail firms. Instead of testing only whether processes were followed, firms must now evidence whether customers are getting good outcomes across products and services, price and value, consumer understanding, and consumer support, and whether any groups of customers, including those with characteristics of vulnerability, are getting worse outcomes than others.

In practice that means more data-led monitoring: outcome measures such as product performance, complaint and cancellation rates, arrears outcomes, call handling times and comprehension testing, broken down by customer group. Compliance monitoring increasingly works alongside the first line’s outcome MI, testing whether it’s reliable and challenging what it shows. Our Consumer Duty guide for Senior Managers covers the outcomes and accountability in more depth.

Financial Crime Monitoring

Financial crime controls need monitoring too: customer due diligence quality, screening, transaction monitoring alert handling, suspicious activity reporting and sanctions. At some firms this sits in the compliance monitoring plan; at others the MLRO runs a separate financial crime assurance programme. What matters is that it’s covered and that the two programmes don’t leave gaps between them. Our guides to transaction monitoring, customer due diligence and the business-wide risk assessment describe the controls that financial crime monitoring tests.

An Annual Compliance Monitoring Cycle

WhenActivity
Before year startRefresh the compliance risk assessment; draft the plan; estimate resource; board approval
Each quarterDeliver scheduled reviews; report findings and action status to senior management and the board or committee
OngoingTrack actions; validate closed actions; respond to new risks and regulatory change with ad hoc reviews
Mid-yearReview the plan against risks and progress; re-prioritise if needed, with board visibility
Year endAnnual compliance report; Consumer Duty board report (for retail firms); lessons for next year’s plan

Technology and Monitoring

Monitoring tools have improved significantly. Case management and workflow systems track reviews and actions; analytics tools test whole populations; call analytics and speech recognition flag interactions for review; and dashboards bring outcome MI together. Technology makes monitoring more efficient and better targeted, but it doesn’t replace judgement. Someone still has to decide what the data means, whether a finding is serious, and what the business should do about it.

Resourcing: In-House, Outsourced or Fractional

How a firm resources compliance monitoring depends on its size and risk.

ModelHow it worksSuits
In-house teamA head of compliance monitoring and analysts run the programme under the compliance officerLarger and higher-risk firms
Compliance officer does itThe SMF16, often combined with SMF17, runs a proportionate programme personallySmall firms with simple business
Outsourced monitoringA compliance consultancy carries out file reviews or thematic reviews to an agreed planSmall and mid-sized firms needing capacity or specialist skills
Fractional compliance officer plus outsourced reviewsAn experienced fractional SMF16 owns the plan and judgements; routine testing is outsourcedSmaller firms wanting senior oversight without a full-time hire

Outsourcing the testing doesn’t outsource the responsibility. The compliance officer and the board remain accountable for the programme and its conclusions, as our guide to what you can and can’t outsource explains. For sizing a part-time arrangement, see how many days a fractional compliance officer needs.

Who Runs Compliance Monitoring

At the top sits the compliance officer, approved as SMF16 at most firms, who is accountable for the compliance function and therefore for the monitoring programme. At larger firms, a head of compliance monitoring or compliance assurance runs the programme day to day, with monitoring managers and analysts beneath them.

The skills that make a strong monitoring professional are distinct from advisory compliance work:

  • the ability to design a risk assessment and turn it into a realistic plan
  • a rigorous, evidence-based approach to testing and sampling
  • clear, concise report writing that a board can act on
  • the confidence to rate a finding honestly and escalate when needed
  • sector knowledge, so the right risks are tested in the right way
  • increasingly, comfort with data and analytics

When we recruit compliance officers, we test monitoring experience specifically, because it’s the part of the role the regulator looks at most closely when things go wrong. Our pages on compliance officer recruitment (SMF16), combined compliance officer and MLRO recruitment and part-time compliance officers explain how we find people with genuine monitoring depth, and our guide to the experience that matters by firm type covers sector differences.

Scenario: A consumer credit firm’s compliance monitoring plan covers the same twelve areas every year, each reviewed once, using small random samples of files. Every report rates the area “green”. Then complaints about arrears handling rise sharply, and an FCA information request shows the firm has no evidence of how it identifies customers in financial difficulty. The firm rebuilds its programme from a fresh risk assessment: arrears and forbearance move to quarterly thematic reviews with targeted samples of vulnerable customers, outcome data is added to every report, and closed actions are re-tested. The board’s next report shows several amber and red ratings, and for the first time a clear plan to fix them.

Common Weaknesses Regulators Find

  • plans that aren’t based on a real risk assessment, or that never change from year to year
  • monitoring that tests whether a process was followed, but not whether customers got good outcomes
  • samples too small or too random to find problems in high-risk areas
  • findings rated too generously, so the board sees green when the reality is amber
  • actions agreed but never completed or validated
  • resource too thin to deliver the plan, without the board being told
  • compliance testing its own advice or first-line work without recognising the independence problem
  • financial crime monitoring falling between compliance and the MLRO

Getting Started: A Practical Checklist

  • Map your obligations by activity, product and channel.
  • Assess risk using complaints, breaches, MI, audit findings and regulatory priorities.
  • Draft a plan with frequency, scope and estimated days for each review.
  • Check resource against the plan and close any gap honestly.
  • Agree templates for review reports, ratings and action tracking.
  • Get board approval and agree how often you’ll report.
  • Deliver, report and re-test, then refresh the plan as the business changes.

Compliance Officer and Monitoring Recruitment

The people who make monitoring work. Every SMF search is led personally by Adrian Lawrence FCA

Practice Area

Compliance Officer


The SMF16 who owns the programme.

→ SMF16 recruitment → Combined SMF16 and SMF17
The monitoring plan →
Practice Area

Flexible Cover


Senior oversight, part of the week.

→ Part-time compliance officer → Interim compliance cover
Fractional or full-time? →
Practice Area

Outcomes and Conduct


What monitoring tests.

→ Consumer Duty guide → Vulnerable customers
Financial promotions →
Practice Area

Financial Crime


The MLRO’s side of assurance.

→ MLRO recruitment → Financial crime leadership
Transaction monitoring →

Every SMF search is led personally by Adrian Lawrence FCA

Frequently Asked Questions

Is compliance monitoring a regulatory requirement?

Yes, in substance. SYSC requires adequate arrangements to ensure compliance, MiFID investment firms must run a risk-based monitoring programme, and the Consumer Duty requires retail firms to monitor customer outcomes. The scale should be proportionate to the firm.

Who is responsible for compliance monitoring?

The compliance officer, usually approved as SMF16, is accountable for the compliance function and its monitoring. The board approves the plan and oversees the results.

How often should compliance monitoring be done?

Continuously, through a plan that reviews higher-risk areas more often. Many firms review their highest-risk areas quarterly and lower-risk areas annually or on a rolling cycle.

What is the difference between a compliance monitoring plan and a compliance monitoring programme?

The plan is the schedule of reviews for the year. The programme is the whole activity: risk assessment, plan, testing, reporting, actions and validation.

Can compliance monitoring be outsourced?

The testing can be, but accountability can’t. The compliance officer and board remain responsible for the programme and its conclusions.

What qualifications should a compliance monitoring manager have?

Relevant sector experience matters most, alongside a structured approach to testing and strong report writing. Professional qualifications such as those from the ICA or CISI are common and useful.

About the Author

Adrian Lawrence FCA is the founder of SMF Capital. He is a Chartered Accountant and Fellow of the ICAEW, holds a practising certificate in his own name, and is a former listed-company Finance Director with a BSc from Queen Mary College, University of London. He founded FD Capital in 2018 and has since built a network of five specialist recruitment practices. He leads every SMF Capital search personally. View Adrian’s ICAEW profile.

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