What a CFO Should Know About Compliance Monitoring

Most CFOs think of compliance monitoring as the compliance officer’s business. At an FCA or PRA-regulated firm, that view doesn’t hold up for long. Monitoring tests areas the CFO usually owns, produces information the CFO sits on the board to scrutinise, and competes for budget the CFO controls. And because the CFO of a regulated firm is usually a Senior Manager, it also forms part of the evidence of whether they took reasonable steps in their own area.

SMF Capital has published a detailed guide, Compliance Monitoring Explained, covering the rules, programme design, testing and board reporting. This article picks out what matters from the finance chair.

Why It Lands on the CFO’s Desk

At most regulated firms, the CFO or finance director holds the chief finance function (SMF2), or at smaller firms sits on the board under the executive director function (SMF3). Either way, they have a Statement of Responsibilities setting out what they are accountable for, and the duty of responsibility applies: if something goes wrong in their area and they didn’t take reasonable steps to prevent it, they can be held personally accountable. Our guide to the duty of responsibility and reasonable steps explains how that works.

Compliance monitoring is one of the main ways a Senior Manager can show reasonable steps. If monitoring tested the finance-led controls, found problems and the CFO made sure they were fixed, that is strong evidence. If monitoring never looked at finance, or found problems that were left open, it points the other way.

The Finance Areas Monitoring Tests

The exact scope depends on the firm, but these areas regularly appear in monitoring plans and usually sit with the CFO:

• Client money and assets. CASS reconciliations, segregation, records and the CMAR return at firms that hold client money.
• Safeguarding. Reconciliations and segregation of customer funds at payments and e-money firms, and the annual safeguarding audit.
• Regulatory returns. Accuracy, timeliness and sign-off of financial, capital and other returns to the regulator. Our guide to FCA regulatory reporting covers the main obligations.
• Capital and liquidity. Whether calculations follow the rules, thresholds are monitored and internal assessments are kept up to date.
• Fair value. Under the Consumer Duty, whether the firm can evidence that its prices represent fair value, and whether charges match what customers were told.

A CFO who knows which of these are in this year’s monitoring plan, and what the last reviews found, is in a much stronger position than one who finds out when the board pack arrives.

Reading Monitoring Reports as a Director

As a board member, the CFO receives monitoring results for the whole firm, not just finance. The FCA expects boards to challenge what they receive, not simply note it. Questions worth asking of any monitoring report include:

• Why were these areas tested this period, and what was left out?
• How big were the samples, and how were they chosen?
• Which findings are rated most serious, and who owns the actions?
• How many actions from previous reviews are overdue, and why?
• Have any closed actions been retested, and did the fix work?
• Are any findings repeats of earlier ones?

A CFO is often well placed to ask these questions, because they are the same ones an audit committee asks of internal and external auditors. Our article on the compliance monitoring plan and what the board should see goes further into what good board reporting looks like.

Paying for Monitoring

Monitoring takes time and skill, and at many firms the CFO decides how much is spent on it. Under-resourcing is one of the most common reasons programmes fail: the compliance officer is stretched, monitoring slips, and the gaps only become visible when the regulator asks.

There are three main ways to resource it, and many firms combine them.

For smaller firms, a part-time compliance officer is often the most cost-effective route, provided the time commitment is realistic. The CFO’s job is to make sure whatever model the firm chooses is funded well enough to work, rather than cut back each budget round.

When Monitoring Finds Problems in Finance

Findings in finance areas can feel uncomfortable, particularly when they relate to reconciliations or returns the finance team believes are under control. The most effective CFOs treat them as useful rather than critical. A monitoring finding on CASS or safeguarding, raised and fixed internally, is far better than the same issue found by the regulator or an external auditor.

The practical response is the same as for any audit finding: understand the root cause, agree an action the team can actually deliver, assign an owner and a date, and make sure the fix is retested. Repeat findings in finance usually point to a process or system weakness that needs investment, and the monitoring evidence can support the business case.

The CFO and the Compliance Officer

At well-run regulated firms, the CFO and the compliance officer work closely. The compliance officer needs the CFO’s support for resources and for fixing finance-led findings. The CFO needs the compliance officer’s monitoring to give them confidence in areas they are accountable for. When that relationship works, monitoring becomes a shared tool rather than an inspection.

For CFOs considering a move into a regulated firm, it’s worth asking about the monitoring programme during the process: what it covers, what it found last year, and how many actions are open. The answers say a lot about the control environment you would inherit. SMF Capital’s SMF2 CFO recruitment page explains what firms look for in a regulated finance leader.

For the full guide, including programme design, sampling, an annual monitoring cycle and common weaknesses the regulator finds, read Compliance Monitoring Explained.