Hey man, hoping it's not a bug, but the other thing you can try is to set the difficulty from the map.
I'm not sure whether doing it by holding your interact key gives the same options, but setting the difficulty from the map normally tells you why you aren't able to set a mode.
In my case it's normally because I've DC'd and am not the team leader anymore
What other method is there instead of holding square to get into the missions settings to change the missions difficulty?
So in my case there was no DC as I only started the map.
So the method I go to start the mission is the following.
1. Fast travel to the mission
2. Press Square to bring up the missions settings (change difficulty and match making)
3. Try to change the difficulty from Normal to Challenge (but there is only Normal and Hard to choose from)
4. Choose hard as it is the on;y real option
5. Press X to do matchmaking quick.
6. Get the team together and start mission
But for some odd reason I have no challenge mode on any of my missions.
Might need to log a ticket with Ubisoft to see what they have to say about it.
The reason I think it might be something in my character is that all you okes can do the challenge mode and the gates are open.
So I have no idea, maybe and this is really just a maybe, when I do matchmaking there is no one that meets the criteria to do Challenge mode and we automatically go to Hard.
But in that case then it should have had at least the option to give me Challenge mode before I even do match making.