* ESMA finds poor confidentiality controls at agencies
* ESMA may take enforcement action
By Huw Jones
LONDON, Dec 2 The "Big Three" credit rating
agencies that score European Union government debt could be
fined after failing to fix poor practices from the past, the
sector's regulator said on Monday.
Credit ratings are a key part of the financial system
because investors use them to judge how likely they are to get
their money back. But the financial crisis led to unease that
the market is relying on them too much.
The European Securities and Markets Authority (ESMA)
published on Monday results of its investigation into how
Moody's, Standard & Poor's and Fitch
compiled ratings on sovereign bonds between February and October
It criticised delays in the publication of ratings changes
and poor confidentiality controls at the agencies.
Sovereign ratings became politically charged at the height
of the euro zone crisis when S&P infuriated Greece in 2011 by
cutting the rating of its debt while the country's EU bailout
was being renegotiated.
This led to the third of three EU laws to regulate rating
agencies in as many years. From next month, the agencies can
only release changes to sovereign ratings according to a pre-set
calendar to improve transparency.
"ESMA's investigation revealed shortcomings in the sovereign
ratings process which could pose risks to the quality,
independence and integrity of the ratings and of the rating
process," ESMA Chairman Steven Maijoor told reporters.
"They should speed up their processes and make sure they get
their house in order."
ESMA won't assess the actual ratings themselves.
The three agencies will have to carry out "remedial plans"
to ensure full compliance with EU law and to eradicate
inadequate practices form the past, Maijoor said.
ESMA has not determined yet if any rules have been broken
and so whether fines might be appropriate, but its officials are
looking into possible action based on a prior report.
ESMA said the failings might compromise the independence of
the ratings process, such as senior management or even board
members driving ratings changes rather than an agency's lead
analyst, raising concerns about possible commercial incentives.
It was also looking further into how an upcoming rating
change was disclosed to an unauthorised third party before being
released to the market.
The watchdog also found poor controls around the use of
external communication consultants.
The investigation was partly prompted by rumours in the
market ahead of rating changes, causing volatility.
In some cases, ESMA uncovered delays to publication of more
than five days after the rating decision was taken, and in one
case the delay stretched to two weeks.
Ratings must be published in timely manner after giving the
issuer at least 24 hours to challenge any errors.
Agencies were also assigning lead analyst responsibilities
to junior or newly hired staff, ESMA said.
But its report, its third so far into the sector, also found
good practices such as more challenge to the rating
recommendation made by the lead analyst.
In March, ESMA criticised the Big Three agencies for a lack
of transparency over how they evaluate banks and demanded more
robust internal reviews of their methods.
Maijoor said it was not surprising that deficiencies had
been uncovered as the sector moves from being nearly unregulated
to being heavily supervised.