EU Prepping Lawsuit, Fine for Credit Ratings Agencies?
The three largest credit ratings agencies, all based in the United States, have faced plenty of criticism for its decision-making and publicly released outlooks both before and after the global economic downturn. But the European Union appears to be setting up to consider actually suing or fining the trio over damages and ongoing business practices.
The European Securities Markets Authority published a report this month that claimed numerous deficiencies were in play regarding the how sovereign ratings are generated by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. The report found that the agencies demonstrated problems that included conflicts of interest, confidentiality in disbursement of ratings information, timing of information releases and resource allocation (not enough qualified analysts, use of junior-level or newly hired employees, etc). The Authority warned that it has “required the CRAs to put in place remedial action plans to address the issues identified and will monitor their progress against these plans as part of its ongoing supervision.”
The three credit ratings agencies were criticized heavily for their performance in ratings of both companies and countries during the run-up to the worst global recession in more than half a century. In addition, European leaders continued criticism as the agencies in recent years routinely lowered ratings of and put on warning high-debt nations including all of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), even though all of which since proved to have deep-rooted fiscal issues.
The EU previously struck at the agencies with what amounted to an attempt to censure them or, at the very least, tightly control aspects of information releases. Last winter, the EU fast-tracked legislation that restricted the timetable in which any of the agencies could release news of sovereign credit ratings of any EU member. The regulations also empowered investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of “gross negligence” or “malpractice” on the agencies’ part.
-Brian Shappell, CBA, CICP, NACM staff writer