In-house, outsourced or co-sourced compliance: a governance comparison

At a Glance

This article compares in-house, outsourced, and co-sourced compliance models for FCA-regulated firms, focusing on governance aspects such as accountability, capability, information access, provider oversight, continuity, and exit planning. It is aimed at founders, boards, MLROs, and operations leads considering compliance resourcing. The FCA’s updated outsourcing and operational resilience guidance and new third-party reporting rules effective from March 2027 are key contextual drivers.

The FCA's outsourcing and operational-resilience page, updated in July 2026, clarifies that firms retain full responsibility for risks arising from outsourced or third-party services. This includes lifecycle risk management, dependency assessment, and operational resilience oversight. Boards and senior management remain accountable regardless of whether compliance functions are in-house or outsourced. This underscores the importance of clear governance arrangements and robust oversight mechanisms.

From March 2027, firms in scope of the FCA’s new material third-party arrangements reporting regime must notify the FCA about significant outsourcing or non-outsourcing arrangements and maintain an annual register. This regime supplements existing obligations and does not reduce firms’ accountability for managing outsourced compliance or other third-party services. Firms should therefore carefully consider the governance and operational implications when choosing or evolving their compliance delivery model.

Who Needs to Choose

The FCA’s outsourcing and operational resilience guidance primarily affects regulated firms that use third-party services for critical functions, including compliance. Founders, boards, MLROs, and operations leads involved in compliance resourcing decisions should consider the FCA’s expectations on accountability and risk management when choosing between in-house, outsourced, or co-sourced compliance models.

From 18 March 2027, specified in-scope firms must notify the FCA when entering or materially changing a material third-party arrangement and submit an annual register. Firms outside that reporting perimeter continue to meet their existing applicable obligations, including Principle 11 and relevant outsourcing notifications. A compliance-support arrangement should not be labelled reportable without testing the firm and arrangement against the FCA's perimeter and materiality criteria.

Compare the operating models against the same risks

An in-house team offers direct access and business context but can create key-person and specialist-capability gaps. Outsourcing can add breadth and variable capacity, but only if the firm retains enough knowledge, information and authority to challenge the provider. Co-sourcing can combine internal ownership with specialist support, although unclear interfaces can leave each side assuming the other owns the decision.

The board should define the outcomes, non-delegable decisions, information rights, service evidence, escalation path and exit plan before comparing cost. Where the 2027 material third-party reporting regime may apply, the firm should separately test its own perimeter and the arrangement's materiality rather than assuming every compliance provider belongs in the register.

What the FCA evidence establishes

FCA outsourcing accountability and lifecycle risk management

The FCA’s July 2026 update on outsourcing and operational resilience reiterates that firms remain fully responsible for risks from outsourced services, including compliance functions. Firms must manage risks throughout the lifecycle of arrangements and increase oversight as dependency grows. Boards and senior management retain accountability for operational resilience and regulatory compliance, regardless of outsourcing status. Firms should assess whether arrangements meet the FCA’s outsourcing definition and apply relevant rules accordingly, ensuring governance structures support ongoing risk management.

FCA guidance on compliance support from external providers

The FCA’s February 2023 guidance on compliance and other support emphasises that firms must define the scope and objectives of any external compliance service clearly. The firm cannot transfer regulatory responsibility by outsourcing compliance functions and must actively monitor the quality and appropriateness of the service. This requires firms to drive the relationship with providers and maintain oversight, ensuring that external support aligns with the firm’s regulatory obligations and risk appetite.

New FCA reporting regime for material third-party arrangements

Effective from 18 March 2027, the FCA requires specified in-scope firms to notify it when entering or materially changing material third-party arrangements that meet the regime's perimeter and materiality tests. Firms must also submit an annual register of material arrangements. This regime covers both outsourcing and non-outsourcing arrangements for listed firm types but does not alter the firm’s responsibility for managing these arrangements. Firms should review their third-party mapping and governance frameworks to ensure compliance with these new reporting requirements.

Implementation Priorities

MEMA Perspective

Boards should critically assess whether governance arrangements provide sufficient transparency and control over outsourced or co-sourced compliance functions. Key questions include whether senior management has unfettered access to relevant information and whether provider oversight processes are robust and documented. Boards should seek assurance that lifecycle risk management is embedded and that operational resilience plans are tested and updated regularly. Evidence to support these judgements might include board papers detailing compliance oversight, risk registers showing lifecycle management, and reports on provider performance and incident response capabilities.

MEMA recommends that boards thoroughly understand the scope and perimeter of the FCA’s new material third-party arrangements reporting regime and ensure the firm’s readiness to comply. Boards should review the firm’s third-party mapping and reporting processes to confirm that all material arrangements are identified and that any required notification and register submissions will be accurate and timely. They should also verify that senior management is fully briefed on these requirements and that continuity and exit plans for outsourced compliance services are comprehensive and tested. Assurance evidence could include documented third-party registers, internal audit reports on reporting processes, and scenario testing outcomes for continuity plans. This oversight ensures the firm maintains control and meets FCA expectations, reducing regulatory and operational risks.

MEMA helps firms apply regulatory developments through its compliance governance and resourcing support.

Further reading: the FCA's 2026 compliance priorities.

Source Evidence

Disclaimer

This article is for general information only and does not constitute legal or regulatory advice. Firms should assess the application of regulatory requirements by reference to their permissions, products, customers and operating model.

How MEMA Can Help

MEMA can help firms translate regulatory change into practical controls, policies, monitoring activity and board evidence. Book a free scoping call to discuss what this development means for your firm.