AI Powered Contract Management for Tackling the Ever-Changing Banking Compliance Laws

Banking and financial services operate with a full spectrum of financial transactions, ranging from fundamental processes to highly sophisticated deals with the majority of transactions controlled and governed by contracts. Banks sign thousands, or tens of thousands of contracts with customers, vendors or partners which legally bind them to clauses and terms within these contracts. Moreover, banks are governed by multiple, stringent laws and external regulations, which if breached can lead to serious implications.

Laws are continuously changing and being updated, posing a huge challenge to the banks and financial institutions to keep up. With changing regulations, it becomes necessary to update each of the contracts to reflect the new regulations and stay compliant. This is a near-impossible task if handled manually. It would mean individually going through hundreds of contracts, finding the redundant laws, updating them with the new ones etc. The effort could take months and lead to enormous monitory costs for banks to employ the necessary experts to carry out the task.

Let us look at the most pressing changes in regulations that are making the banking sector legal teams lose sleep:

1. LIBOR:  Legal and Finance

LIBOR (London Interbank Offered Rate) is often referred to as the world’s most important number. It is an average benchmark interest rate, that banks must pay each other in case they need to borrow from other banks. The interest rates on various credit products such as credit cards, car loans, and adjustable rate mortgages fluctuate based on the interbank rate.  Globally, LIBOR is included in a whopping $260trn of loans and derivatives.  But LIBOR is due to be phased out by 2021 and replaced most probably by SOFR—the Secured Overnight Financing Rate as the index of choice.


The challenge with the LIBOR phase-out is that no bank or financial institution is prepared for LIBOR to completely cease existing. The contracts with LIBOR have no secondary or fallback provisions in the event LIBOR simply disappears and it can lead to litigations on a massive scale. The potential litigation risks for banks or financial service companies are substantial; especially considering the sheer monetary impact – 190 trillion dollars’ worth of contracts. The risk is unprecedented and something that just cannot be handled manually.


Advanced Contract Management solutions can handle the situation with their ability to automatically parse contracts for certain clauses and keywords and replace them with a secure fall-back clause by pre-configuring the same. This could ensure no contracts are overlooked and all contracts get reviewed and made compliant in a short period. For contracts with complicated clauses, the automated workflows ensure such contracts go to the legal team for review, thus leaving no stones unturned.

2. ASC 606/IFRS 15

ASC 606/IFRS 15 accounting standards guarantee international alignment on how companies recognize revenue from contracts with customers. The guidelines involve the results of your end-to-end processes starting with contracts, through pricing, quotes, orders, and ending with revenue recognition. The full name of the rule is ASC 606: Revenue from Contracts with Customers.


This new rule is already in practice since 2017/2018 and requires financial institutions to spend more time strategizing around contracts and bringing contracts up to date with the new compliance requirements. Doing this effectively may require new skills for some. Also, ASC 606 will make revenue recognition calculations more complicated, potentially requiring new systems to help with processing and forecasting.


CLM systems powered by AI are intelligent and can continuously learn and update from the historic data available. By pre-configuring certain rules and metrics, CLM can make calculating revenue recognition and strategizing around contracts easy, effortless, and structured while ensuring compliance to the mandate. Requirements and metrics can be pre-configured to ensure accurate processing and forecasting of the revenue in question.

3. IFRS 16

IFRS 16, another new accounting standard governing the treatment of leases, came into implementation since January of this year. IFRS 16 defines that a contract can be called a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Services, which often form a part of the lease will no longer be considered in the lease. This new standard will have a significant impact on the banking and financial sectors’ capital requirements and the way they do business with their customers.


It is a time consuming and mundane task to assess every lease the banks have and uncover embedded leases and differentiate between an asset or a service lease. It could often result in manual errors or omissions. Moreover, having resources and processes in place to be able to incorporate the new standards and be compliant with the new requirements can be a big and costly challenge.


Contract lifecycle management solutions, through pre-configured rules and metrics, can automatically identify lease embedded contracts that expose banks and financial institutions to IFRS 16 compliance requirements. CLM solutions enable you to enhance compliance with required asset treatment clauses and help you to consistently report year on year commercials associated with these assets. Also, with CLM in place all contracts going forward will remain IFRS 16 compliant from day one.

To conclude, navigating through regulatory frameworks and updating contracts to reflect the new legal standards is a challenge that requires a sophisticated automated system in place and cannot be handled effectively through manual intervention alone. Contract management systems, specifically designed for this purpose, are a great way to achieve speed and control in your contract processes while ensuring all contracts are easily updated  to comply with existing as well as emerging regulations.


Mr. Panchal is the Vice President at Zycus. An ardent promoter and practitioner of Theory of Constraints and CCPM, Digesh brings with him deep domain expertise from his long and rich personal experience in manufacturing. In his prior stint at Verdantis, he has led highly complex implementations of Master Data Management solutions for multiple master domains, across various industries and varied deployment models. As a forward-thinking leader with extensive experience in the design, development, testing, and rollout of cutting-edge B2B SaaS solutions, Digesh excels at driving the day-to-day operations of complex enterprises to produce turnarounds. At Zycus, Digesh is responsible for building a best-in-class AI-driven Enterprise CLM software and drive market traction.
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