5 Challenges of Contract Compliance Management in Financial Institutions

Contracts serve as foundational documents that formalise relationships, define obligations, and protect the interests of a financial services institution (FSI) and its clients, vendors and partners.

FSIs need to fulfil contract-specific requirements, such as performance metrics, financial terms and service-level agreements (SLAs), and any regulatory requirements that may apply to these contracts.

Effectively managing both types of compliance is essential to minimise risks, avoid costly penalties, and maintain trust with clients and regulators.

This article outlines some specific challenges FSIs face in navigating compliance within contracts. It also shows how a comprehensive automated approach to contract compliance management can address these challenges.

The Dual Nature of Compliance Obligations in Financial Contracts

Regulatory compliance involves adhering to government-mandated laws and industry regulations that apply to financial services. It is legally enforceable and subject to periodic updates, meaning FSIs must adapt relevant existing contracts as applicable new regulations are enacted.

Non-regulatory compliance is where the parties have mandatory or conditional obligations within their contracts that are not legally required by regulators but are essential for operational effectiveness, client relationships and risk management.

These elements often shape the FSI’s service quality, client satisfaction and financial health.

Both types of compliance are critical, yet managing them within contracts is challenging, especially in high-volume, high-stakes environments such as banking, asset management and insurance. These challenges include:

1. Complexity of Regulatory Compliance Management

Regulatory compliance in financial services is notoriously complex due to the wide array of global, regional and industry-specific regulations that can apply to an FSI.

Some of the primary challenges include:

Multiple, Overlapping Regulations

FSIs often operate in multiple jurisdictions, each with its own set of regulations. This can lead to overlapping or even conflicting compliance requirements, like:

• Data Protection Regulations: GDPR in the European Union mandates strict data handling practices, while the US has state-specific privacy laws, such as the California Consumer Privacy Act (CCPA).
• Anti-Money Laundering (AML) and Know-Your-Customer (KYC): Different countries have distinct AML and KYC requirements that must be reflected in contracts to ensure cross-border compliance.
• Industry-Specific Frameworks: Different sectors of the financial industry typically operate under different regulations, a significant problem for FSIs that engage in specific financial transactions or markets.

Ensuring that each contract aligns with the applicable regulations requires detailed knowledge of these laws and the ability to tailor contract terms accordingly.

Frequent Regulatory Changes

Regulations governing financial services are constantly evolving to address emerging risks, such as cybersecurity threats, data privacy concerns and financial fraud. FSIs must not only stay updated on these changes but also adapt existing contracts to reflect new requirements.

This can be especially challenging for long-term contracts, which may need amendments to comply with newly introduced regulations.

Failure to incorporate these updates into contract terms, as well as into clause libraries and contract templates, can expose the FSI to non-compliance risks, which can lead to penalties, reputational damage and operational disruptions.

Resource-Intensive Compliance Tracking

Manual tracking of regulatory requirements within contracts is labour-intensive, time-consuming, and prone to human error. FSIs often handle thousands of contracts containing varying regulatory obligations, making manual tracking highly impractical.

The complexity of tracking regulatory deadlines, such as those for reporting, auditing, and certification renewals, requires specialised knowledge and precise management to avoid penalties.

2. The Underestimated Importance of Non-Regulatory Compliance

While regulatory compliance often gets the most attention due to the potential repercussions for FSIs that don’t treat it seriously, non-regulatory compliance is equally important for FSIs. Non-regulatory obligations directly impact customer satisfaction, operational efficiency, and the FSI’s ability to meet financial and performance commitments. Key challenges include:

Managing Performance Metrics and Service Standards

Contracts often contain SLAs, key performance indicators and other performance metrics that define service quality and timeliness. For instance, a contract with a third-party vendor may specify the uptime percentage for a critical technology service, while a client agreement might outline specific investment performance expectations.

Tracking these performance metrics is crucial for maintaining service quality and meeting client expectations. However, without a structured tracking process, performance obligations can be easily overlooked, resulting in missed targets, client dissatisfaction or financial penalties.

Financial Commitments and Payment Terms

FSI contracts often include complex financial terms, such as payment schedules, fee structures, discounts and penalties. Compliance with these terms is essential to avoid financial loss and ensure profitability.

For example, an investment contract may include profit-sharing agreements based on specific performance benchmarks, while a vendor contract could offer early payment discounts that yield significant savings.

However, tracking and managing financial terms across a high volume of contracts is difficult, especially when payment schedules or terms vary significantly. Missing a payment deadline or failing to capitalise on discounts can lead to substantial financial losses.

Deliverables and Milestones

Many contracts contain non-regulatory milestones, such as project deadlines, product delivery dates or periodic reviews. These deliverables are crucial to fulfilling contractual obligations and maintaining operational continuity.

In cases where deliverables are tied to financial penalties, missed milestones can lead to financial and reputational costs.

Managing these non-regulatory deadlines is complicated, particularly in FSIs with complex projects and multiple stakeholders. Without a structured tracking system, it’s easy for deliverables to slip through the cracks, resulting in contract breaches and strained client or partner relationships.

3. Identifying and Mapping Compliance Requirements

Effectively managing both regulatory and non-regulatory compliance requires that each contract gets thoroughly reviewed to identify relevant obligations, map them to specific contract terms, and assign accountability for compliance. Typical challenges here include:

Determining Applicable Regulations and Non-Regulatory Obligations

Each contract must be analysed to determine which regulations apply and which specific non-regulatory obligations are involved. This process requires expertise in regulatory knowledge as well as an understanding of business-specific obligations like SLAs and financial commitments. Missing or misinterpreting these requirements can lead to compliance gaps, exposing the FSI to penalties or operational disruptions.

Mapping Obligations to Contract Terms

Once obligations are identified, they must be mapped to specific contract clauses and tracked within a compliance management system. This involves not only categorising regulatory elements such as data privacy clauses or AML requirements but also mapping non-regulatory elements like deliverable deadlines, financial terms and performance metrics. This level of detail can be difficult to manage, particularly when contracts are updated frequently or vary widely in structure.

Ensuring Consistent Oversight and Accountability

For compliance management to be effective, each regulatory and non-regulatory element within a contract needs a designated owner responsible for monitoring and maintaining compliance. However, assigning and tracking ownership across numerous obligations is complex, especially if manual processes are in place. Without clear accountability, compliance efforts may become inconsistent, increasing the risk of obligations being overlooked.

4. Tracking Compliance Deadlines and Milestones

In both regulatory and non-regulatory contexts, contracts often involve deadlines that must be carefully adhered to. These include reporting deadlines, payment dates and SLA milestones. Common challenges include:

Tracking Regulatory Deadlines

Contracts that involve regulatory requirements may specify deadlines for reporting, audits or certification renewals. Missing these deadlines can have severe consequences, including fines, legal action or reputational damage. However, regulatory deadlines can vary significantly by jurisdiction and regulatory body, making it difficult to track them without a sophisticated tracking system.

Managing Non-Regulatory Milestones and Deliverables

Non-regulatory deadlines, such as project milestones, payment schedules and deliverables, are equally critical for maintaining client satisfaction and operational continuity. Again, without a structured tracking process, FSIs risk missing these deadlines, which can lead to penalties, loss of trust and revenue impacts.

Manual tracking of both types of deadlines is inefficient and error-prone, especially when deadlines differ across contracts. Automating deadline tracking with a system that can issue reminders and notifications for upcoming obligations is essential to maintain compliance and ensure no deadlines are missed.

5. Limitations of Manual Compliance Tracking

In FSIs where contracts are high-volume and high-stakes, manual compliance tracking is both impractical and risky. Major issues include:

High Risk of Error and Oversight

Manual tracking relies on individuals to monitor deadlines, obligations and compliance requirements, which can lead to errors and overlooked deadlines. These errors can expose the FSI to regulatory penalties and damage client relationships.

Inconsistent Compliance Oversight

Without an automated system, compliance oversight can vary across an FSI’s individual departments, leading to inconsistent practices and standards. This inconsistency increases the risk of non-compliance, especially if key contractual obligations fall outside the scope of regulatory compliance teams.

Resource-Intensive Process

Manual compliance tracking is labour-intensive and costly, requiring significant time and resources. With automated tracking, FSIs can improve efficiency and accuracy, reallocating resources to more strategic functions.

Benefits of Automation in Compliance Management

Automating compliance tracking allows FSIs to overcome many of the challenges outlined above. Key benefits include:

Centralised Compliance Visibility

Automated systems provide a centralised repository for regulatory and non-regulatory obligations, making it easy to monitor contract compliance from a centralised dashboard. This visibility enables quick access to contract details and simplifies audit preparation.

Proactive Alerts and Notifications

Automated alerts for deadlines and milestones help ensure that compliance requirements are met on time. For instance, notifications about important approaching dates can prompt stakeholders to take action well in advance, reducing the risk of missed obligations.

Data Analytics for Compliance Optimisation

Advanced analytics can offer insights into compliance trends, helping FSIs identify areas where compliance is frequently delayed or where regulatory requirements are difficult to meet. These insights can drive continuous improvement and reduce compliance risks.

Wrap-up

For FSIs, managing both regulatory and non-regulatory compliance within contracts is complex but essential. Contracts contain a mix of legally mandated and business-critical obligations that must be carefully tracked to avoid financial penalties, maintain client relationships, and uphold regulatory standards.

While manual compliance tracking can lead to costly errors and inefficiencies, automation offers a solution by providing centralised visibility, proactive alerts and data-driven insights.

By adopting an automated approach to compliance management, FSIs can reduce risks, streamline operations, and ensure they meet all obligations across the full lifecycle of their contracts.

As regulations continue to evolve, a structured, technology-driven approach to compliance will become even more vital for long-term success in the financial services industry.

To learn how Gatekeeper can help with your contract compliance management, don't hesitate to get in touch with us.