The European Securities and Markets Authority (ESMA) has fined Fitch Ratings Limited (Fitch) €1.38 million for a series of negligent breaches of the Credit Rating Agencies (CRA) Regulation.
ESMA found certain senior analysts in Fitch transmitted information about upcoming rating actions on sovereign ratings to certain senior persons in a parent company of Fitch before it was made public. Further, ESMA found that Fitch failed to have proper internal controls in place to ensure it provided a rated entity with the minimum time period to consider and respond to a rating action before making it public. Fitch failed to allow Slovenia 12 hours (the minimum required period at the time) to consider and respond to the downgrade of its sovereign rating in 2012, as required under the CRA Regulation.
Fitch’s breaches of the CRA Regulation
ESMA carried out a review of the sovereign rating processes of a number of CRAs during 2013, focused on the period from 1 September 2010 to 25 February 2013, which led to ESMA identifying a number of potential breaches by Fitch of the CRA Regulation.
Unauthorised disclosures of information on new and potential sovereign rating changes
From 1 December 2010 to 7 June 2012, certain senior analysts in Fitch transmitted information about upcoming rating actions on sovereign ratings to certain senior persons in Fimalac S.A., which was a parent company of Fitch. Under the CRA Regulation it is prohibited to disclose information on upcoming rating actions to other persons than those involved in the production of the relevant credit ratings or the rated entity. In the period concerned there were nine separate sets of email exchanges concerning actual or potential upcoming rating actions relating to six countries - Greece, France, Ireland, Italy, Portugal and Spain. ESMA found a breach on Fitch’s part for those email exchanges between 1 June 2011, the date of entry into force of the infringement provisions in the CRA Regulation, and 7 June 2012.
Lack of sound internal controls to support compliance with the 12 hour requirement
Between 1 June 2011, the date of entry into force of the infringement provisions in the CRA Regulation, and 14 February 2012, Fitch’s internal controls for the purpose of complying with the 12 hour requirement were affected by substantial shortcomings:
the policy framework provided unclear guidance to staff on how to comply with the 12 hour requirement; those responsible for supervising compliance with the 12 hour requirement within the sovereign and international public finance group did not exercise their control functions; the internal control functions did not detect this absence of control; and follow-up action taken by the internal control functions did not detect and adequately address the above shortcomings.
Failure to comply with the 12 hour requirement
On 26 January 2012, Fitch informed the representatives of Slovenia of its intention to downgrade its sovereign rating for Slovenia, without offering any information on the grounds for the intended downgrade. Only on 27 January did Fitch send that information to Slovenia’s representatives who made it known that, in accordance with the CRA Regulation, they expected to be granted 12 hours from the time of receipt to assess the information. Fitch proceeded with the public announcement of the downgrade approximately 3 hours after its transmission of the grounds of the rating action to Slovenia.
Fitch’s actions and right to appeal
Fitch has voluntarily taken measures to ensure similar infringements cannot be committed in the future. ESMA took this mitigating factor into account when assessing the level of its fine.
Fitch may appeal against this decision to the Board of Appeal of the European Supervisory Authorities. Such an appeal does not have suspensive effect, although it is possible for the Board of Appeal to suspend the application of the decision in accordance with Article 60(3) of the CRA Regulation.
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