Is Your Firm Compliant or Complacent?

How contracting processes are harming compliance efforts.

Almost everyone I know has a story about the financial crisis of 2008. Lost homes. Investment losses. Impact on retirement. Since then, federal regulators have been hard at work ensuring banks pass stress tests, aren’t “too big to fail” and that their operational processes can survive another financial disaster.

But are they looking in the wrong place?

Banks are, in large part, firms with money under contract with another firm to do something with that money. Swaps. Derivatives. Commodities. Mutual funds. Hedge funds. All of these firms have contracts to manage their businesses, and every contract has to be drafted, negotiated and signed.  While most compliance efforts are focused on business risk, very few are focused on contract risk.

They should be.

We recently surveyed nearly 100 general and corporate counsels and discovered a heavy dependence on manual processes to create, track and modify contracts. As a result, the businesses these contracts support are put at significant risk.

In fact, the survey shows that only 1 percent would call their current contracting process “excellent,” while more than 80 percent rate it a 7 or below on a scale of 1 to 10. There’s no doubt about it; weak contracting processes place financial services firms at more risk and make them more likely to be out of compliance.

In January of 2015, Jamie Dimon, the Chief Executive of JPMorgan Chase, was quoted as saying that “Banks are under assault” in the face of a wave of new regulations — and regulators. Mr. Dimon also noted that the bank would be spending “several billion dollars” to deal with fines and related costs, a large part of which is expected to be legal fees.

One of the major issues is access to the information contained in contracts. In the survey, over 46 percent of respondents said they were maintaining contracts as paper files, and over 64 percent said they were storing them on network drives. Only 27 percent claimed to be using commercial contract management software. In fact, 27 percent reported that poor contract management processes prevent them from ensuring some level of compliance, while more than 25 percent claim that inefficient contract processes lead to missed milestones.

Even with commercial contract management software, most firms are able to only capture the document and search for keywords. Exari combines document management with a Universal Contract Model (UCM) that enables the system to capture the data separate from the document, enabling end users to report on information repository wide and quickly be able to see where their risks, obligations and exposures are.

Recently, one of our financial services firms told us about a request they received to report on one particular risk area across the contract repository. While being able to answer the question in under an hour, they decided to ask one of their outside law firms for a bid to do the same work.

The bid? $1.7 million dollars and months of work.

There’s no doubt about it – an efficient contract management process can have a direct and material impact on a company’s results. In the survey, nearly 40 percent of respondents said they have no or inadequate visibility into risk and 13 percent identified regulatory compliance as a key pain point.

At the end of the day, every process underpinning a business plays a key role in the operation of a firm; but weak contract management, especially in financial services firms, can lead to compliance-related fines, significant risks and ultimately, the inability to react quickly enough in the face of a crisis.