The European Union said on Monday that it identified deficiencies in the production and issuing processes for sovereign ratings at the three largest credit rating agencies.
The report follows an investigation into the rating processes at Fitch Ratings, Moody’s Investors Service and Standard & Poor’s launched in February amid concerns regarding conflict of interest, the impact of sovereign ratings on other ratings, issues surrounding the confidentiality and timing of rating actions and the agencies’ ability to handle numerous rating actions during a period of instability.
ESMA identified deficiencies in resources allocated to sovereign ratings, independence and avoidance of conflicts of interest, confidentiality and timing of rating action publication.
“As of the date of this document, ESMA has not determined whether any of the findings in this report constitute a breach of the provisions of the Regulation,” the report reads. “The report is therefore published without prejudice to the possibility of further investigations which could lead to supervisory or enforcement actions.”
ESMA Chairman Steven Maijoor said the shortcomings identified by the investigation could risk the integrity and quality of the ratings and rating process.
“The impact which changes in these ratings can have on financial markets, and sovereign states, can be significant,” Maijoor said. “Therefore, it is imperative that users can have confidence that the CRAs have adequate systems and controls in place to ensure that ratings are rigorous, free from conflicts of interest and timely. The CRAs who were subject to this investigation still need to make improvements in their working practices to ensure their full compliance with the CRA Regulation and to eradicate inadequate practices from the past.”