Blowback: Fitch, S&P and Moody’s under EU penalty threat

The EU regulator is threatening to fine or deregister three of the top credit agencies. Its sovereign debt investigation has revealed huge “deficiencies” in the way the agencies assigned ratings, which can be strong market movers.

The European Securities and Markets Authority (ESMA) could fine the three largest US rating agencies: Fitch Ratings, Moody's and Standard & Poor's – for "observed deficiencies and main concerns" in the course of the revision of sovereign credit ratings. 

A report by the regulator has blamed the agencies for their involvement in "the disclosure of upcoming rating actions to an unauthorized third party," as well as delays in the publication of ratings changes.

“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,” the report said.

On top of that, the regulator accused the rating agencies of a possible conflict of interest. Failings or potential risks identified could compromise the independence of the ratings process and the rating’s quality.

ESMA has concerns over the "assigning lead analyst responsibilities to junior or newly hired staff" and the involvement of senior company management in rating decisions, the report added.

“The impact which changes in these ratings can have on financial markets, and sovereign states, can be significant. 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”, said Steven Maijoor, the ESMA chair.

Among the measures which can be applied to the agencies, the ESMA could levy fines or withdraw an agency’s registration, says the Financial Times.

Since the beginning of the financial crisis CRAs were subjects to criticism both in Europe, and in the United States for inaccurate assessment of securities reliability and their out-of-date publication. 

In 2011 the sovereign credit rating of Greece was lowered during negotiations with international creditors. The same year Washington was hit when S&P lowered the United States' high credit rating.