LONDON – A European financial watchdog on Monday left open the door for regulatory action after it said it discovered a series of “shortcomings” in how the major rating agencies assess risk to sovereign debt.
The European Securities and Markets Authority said in a report on Monday that its investigation into Fitch, Moody’s and Standard & Poor’s revealed issues in the sovereign rating processes, which “could pose risks to the quality, independence and integrity of the ratings.” The investigation took place between February and October this year.
The major rating agencies have faced criticism from European political leaders in recent years over the timing of their actions regarding the creditworthiness of European nations, including so-called bulk rating changes of several countries at once. Some critics have argued that sovereign rating changes helped exacerbate the financial crisis.
“The impact which changes in these ratings can have on financial markets, and sovereign states, can be significant,” said Steven Maijoor, the chairman of the authority. “Therefore, it is imperative that users can have confidence that the [credit ratings agencies] have adequate systems and controls in place to ensure that ratings are rigorous, free from conflicts of interest and timely.”
The agency said it had not determined whether any of its findings were violations of European financial regulations, adding that it “may take action as appropriate in due course.”
A Fitch spokeswoman said the firm was confident its policies met regulatory standards, but it was “moving swiftly to address any issues identified in the report.”
Daniel Piels, a Moody’s spokesman, said, “Moody’s is committed to complying with the European regulation and effectively managing any potential conflicts of interest as we continue to enhance the performance, processes and transparency that underpin our ratings.”
An S.&P. spokesman said the company was “committed to the highest standards in our ratings activities” and enhancing its analytics and operations with that in mind.
In its report, the watchdog said it was concerned by the involvement of senior management and directors of rating agencies in some instances in the decision-making process regarding rating changes to a nation’s creditworthiness. European regulations require that rating agencies ensure the independence of people involved in the rating process.
ESMA also expressed concerns about how the appeals process is carried out for sovereign rating changes and whether specific protocols are in place at the agencies to ensure that ratings changes are kept confidential until they are released publicly, as well as the timing of how those changes are released.
The regulator said it had asked the agencies to take remedial actions to address its concerns.