What Makes a Compliance Function Effective? Six Questions Every Firm Should Ask

How a firm handles compliance says a lot about how it approaches business and treats its customers.  After years as a Chief Compliance Officer and now as an adviser to financial services and technology firms, I’ve seen one clear pattern: the most successful companies don’t treat compliance as a side function. The best compliance teams aren’t just monitoring and reporting. They are embedded in decision-making, helping shape strategy and execution. That integration is what enables sustainable business growth and prevents compliance and regulatory distractions.

The role of Compliance is rarely straightforward. It has to serve multiple masters, internal and external, with these various stakeholders often having conflicting expectations on what Compliance is there to do. Boards, executive teams, front-line managers, regulators, and customers all have a view on the role of the Compliance function.  In this context, questions around status, influence and authority are never far from the surface.

In regulated sectors especially, Compliance can’t afford to be reactive. High-performing teams act early, anticipating emerging challenges and working in partnership with the business to find solutions that enable growth while maintaining compliance. They are proactive partners, not just regulatory gatekeepers.

So how can you tell if your Compliance function is where it needs to be, or if it could be stronger? I’ve put together six key questions that I believe every compliance leader and executive team should ask. These questions are meant to provoke real reflection and help you to identify where improvements can make your Compliance function be even more effective and efficient.

Question 1: Is Compliance’s purpose clear, widely understood, and aligned with business strategy?

An effective Compliance function doesn’t exist just to enforce rules, it exists to enable sustainable business that meets customer needs. Defining the purpose of the team to ensure that its activities and decisions are shaped by the core mission, means being absolutely clear on the purpose of the function. A high-performing team has its role explicitly defined in terms of what it does, how it does it and crucially, why it matters to the firm’s long-term success.

This means more than a mission statement on a slide deck that sits on a shelf or is pinned to the wall in the office. The Compliance team’s purpose should be aligned with the firm’s strategic priorities. Is Compliance seen as a control function, a trusted adviser, a risk partner, or all three?  Is its mandate understood not just by the executive team, but by business lines, operations and product teams?

When the purpose is well-defined and communicated, Compliance becomes a strategic asset, helping the business move faster and more confidently by helping to identify risks early, providing clear guardrails, whilst at the same time reinforcing a culture of accountability, so the first line takes ownership of risk.

Firms should be asking:

• Has the Compliance team’s role been articulated in a way that connects directly to business goals?

• Do people across the organisation understand and value how Compliance supports active decision-making (not just after the fact)?

• Is the function empowered to challenge constructively and influence outcomes, not just raise red flags through formal monitoring and reviews?

When the purpose of Compliance is clear and aligned to strategy, it shifts from being a cost centre to a source of sustainable value creation.

Question 2: Are we balancing advice and monitoring appropriately as the business evolves?

A mature Compliance function must do more than give good advice. It must also be able to test, challenge, and monitor how that advice is being followed. Striking the right balance between advisory and monitoring/assurance work is a moving target, especially as a firm grows in size, complexity and regulatory scrutiny.

Under SYSC 6.1 of the FCA Handbook, firms are required to maintain a compliance function that is independent, permanent, and effective. Specifically, the function must monitor and regularly assess the adequacy and effectiveness of the measures and procedures put in place to comply with the firm's obligations. The function must also continue to advise and assist the ‘relevant persons’ responsible for carrying our regulated activities to comply with the firm’s obligation under the regulatory system.

Balancing these responsibilities requires clear delineation between the first, second, and third lines of defence. And where these lines are drawn can definitely shift over time as a firm grows.  But everyone should understand who owns which risks, who provides oversight, who provides expert advice and how assurance is delivered. If those boundaries blur, the effectiveness of controls (and regulatory confidence) can quickly erode.

In the early stages of a business, Compliance should often be more focussed on its advisory role, helping to build processes, guide product development and interpret regulations. But as the first line builds its own compliance capabilities, the Compliance function should typically step up its monitoring and oversight activities to provide insight into the business’s performance and the strength of the control environment

Importantly, decisions about the function’s focus and structure shouldn’t be made in a vacuum. They should be actively discussed and reviewed with senior management and the board, especially during moments of change, whether that’s scaling into new markets, launching new products, or facing heightened regulatory scrutiny.

Firms should ask themselves:

• Are we clear on when Compliance is acting as an adviser versus when it’s operating in an oversight/monitoring capacity?

• Do we have a plan to evolve that balance as we grow and/or change our product offering?

• Are we meeting regulatory expectations around independence, objectivity, and effectiveness?

Getting this balance right is not just about satisfying regulators, it’s about making sure Compliance can actually do its job: helping the business take informed risks, meeting customers’ needs, while protecting the regulatory licence of the firm to operate.

Question 3: Do senior leaders actively support compliance, and are we shaping behaviours, not just enforcing processes?

When senior leaders genuinely support compliance, not just in words, but through tangible actions, it sends a powerful message throughout the organisation.  Visible commitment means more than attending Compliance function offsites, speaking about how much the firm values the work of the team. It’s about integrating compliance into everyday business conversations, decision-making, and strategic planning.

Supportive leaders ask the right questions, challenge assumptions, and seek input from compliance professionals as trusted advisers, not just policy enforcers. This moves the Compliance function from being seen as a bureaucratic hurdle to being a core part of how the organisation operates and succeeds, with a seat at the key decision making fora.

Aligned to the agreed purpose of the Compliance function, the goal shouldn’t be to undertake detailed, process focussed monitoring (as necessary as this may, at times , be).  The role of the Compliance function should be as much about shaping and influencing a culture where people make the right choices even when no one is watching. That requires consistent modelling of ethical behaviour by senior leadership, conscious, planned recognition of integrity-driven decisions and a clear message that compliance is a shared responsibility.

Question 4: Is compliance risk appetite clearly defined, understood, and used to guide decisions?

Compliance risk appetite is a powerful enabler of sound decision-making, but only when it’s clearly articulated, consistently understood, and actively used. Critically, executing business strategy within an agreed risk appetite is the responsibility of the business. The first line must own the boundaries within which it operates, with the Compliance function providing insight, challenge and support to ensure those boundaries are realistic, aligned with regulatory expectations, and practically usable.

In this context, a common misconception is that regulatory risk appetite should be zero. In reality, zero risk is neither practical nor sustainable. Regulated firms operate in dynamic, competitive environments, where rules can be complex and open to interpretation. A well-calibrated risk appetite accepts that some level of regulatory compliance risk is inevitable and focuses instead on making that risk visible, managed, and aligned with the firm’s overall objectives and values.

For risk appetite to be effective, it must go beyond high-level statements. It should inform real decisions: Can we onboard this client? Should we offer this product through this channel? Is this marketing approach clear, fair and not misleading? The answers should be rooted in clearly defined compliance parameters, consistently applied across the business.

Ultimately, a meaningful compliance risk appetite framework enables confident, accountable decision-making. It helps the business operate within acceptable boundaries whilst not stifling growth or innovation. Such an agreed approach gives the Compliance function a strong foundation to support, challenge and guide the business, as needed.

Question 5: Is there a shared understanding of key compliance risks across the firm?

The Compliance function having a view on what the risks are is insufficient. What matters is whether that understanding is shared across the organisation, not siloed within the Compliance function. Compliance teams may think they have a clear picture of the key risks, but unless the business recognises, understands, and owns those risks, risks can remain unmanaged.

Risk ownership must live with the people making the day-to-day decisions: product teams, relationship managers, marketing. These are the teams that shape client outcomes and create or mitigate compliance risks in practice.  But for ownership to be meaningful, it needs to be backed by clear frameworks and policies, defined roles and a culture where accountability for compliance is seen as part of business success, not just a defensive measure to protect against regulatory enforcement.

A shared understanding of compliance risks doesn’t happen by accident. It requires strong internal communication, practical training, and active engagement between Compliance and the business. It means more than just presenting a heatmap once a quarter to the risk committee. It involves real conversations about how risks are present  in specific processes, products, or decisions, and what actions are being taken to manage them.

When that shared understanding exists, the organisation can prioritise the most significant risks, avoid duplication of effort across the lines of defence, and respond more rapidly and effectively when issues arise.

Question 6: Do we have the right skills, leadership, and capacity in the compliance team?

A strong Compliance function is not just built on technical knowledge, it depends equally on leadership strength, influence, adaptability, and the ability to connect with the business. It's not enough to know the rules; the Compliance team must be able to interpret them in the context of the business, communicate them effectively and challenge business decisions constructively when needed.

Leadership is key. Compliance leaders must set the tone, command respect across the organisation, and navigate the space between enabling the business and protecting it. They need strategic vision, strong communication skills, and the credibility to influence at the highest levels. Building and maintaining relationships across the firm that endure moments of debate and differences of opinion is key.

The broader team must bring a mix of skills: regulatory expertise, data literacy, business acumen, and equally importantly, emotional intelligence. As the regulatory landscape evolves and expectations change over time, so too must the Compliance function’s ability to adapt, whether that’s through agile ways of working, adopting new technologies, or building capabilities in areas like ESG and AI governance.

Critically, resourcing must keep pace with the firm’s ambition. If the business is expanding, using new technologies, or launching complex products, Compliance must have the headcount, systems, and tools to match that growth.  Under-resourced teams can lead to reactive compliance and missed risks.

Ultimately, an effective compliance team doesn’t just monitor the business. The team partners with the first line, whilst at the same time providing challenge, with the ultimate objective of helping steer the business safely and sustainably through complexity.

Final thoughts

These aren’t questions to ask once and tick off. They should be part of a continuous cycle of reflection, challenge, and improvement, embedded into regular self-assessment, leadership dialogue across the firm. The Compliance function should be dynamic, not static.

A Compliance function that evolves in line with the business, anticipating risks, shaping decisions, and influencing culture can be a competitive advantage. It protects reputation, builds trust with internal and external stakeholders and gives first line leadership the confidence to grow and innovate within clear, agreed boundaries. A high performing Compliance function should play an integral role in the delivery of the long term sustainable business strategy of the firm.