ASIC finds ratings houses wanting

In a report which carries some implications for funds management ratings houses, the Australian Securities and Investments Commission (ASIC) has published the results of a surveillance of the major credit ratings agencies (CRAs) which found them falling short in a number of key areas.

In particular, the ASIC report raised questions about conflicts of interest surrounding payment for ratings and suggested that conflicts of interest could arise “where a CRA is being paid to issue a credit rating by the rated entity or by the obligor, originator, underwriter or arranger of the rated obligation”.

The report also queried the appropriateness of the analysts who presented recommendations to ratings committees having a vote on those committees, along with their relevant supervisor.

“We consider that this may compromise the robustness of the decision and may also be perceived as a conflict of interest, particularly where the rating committee is made up of only a small number of members,” the ASIC report said.

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The report also pointed to problems with respect to the frequency of board reporting, noting that:

 (i) one board met only once during the surveillance period and, in our view, did not receive a sufficient level of information on compliance matters to enable it to conclude that it was meeting its AFS licence obligations;

(ii) another board did not meet to discuss compliance matters, and instead relied on committees to conduct these activities. The committees did not appear to be operating under any formal delegation and there was an inadequate level of reporting back to the CRA board on the performance of these committees; and

(iii) some minutes of board meetings simply noted that there were no compliance issues, without explaining what compliance activities were conducted during a period to substantiate these declarations.

The ASIC surveillance covered six CRAs licensed in Australia –

(a) A.M. Best Asia-Pacific Limited (A.M. Best);

(b) Australia Ratings Pty Ltd (Australia Ratings);

(c) Equifax Australasia Credit Ratings Pty Limited (Equifax);

(d) Fitch Australia Pty Limited (Fitch);

(e) Moody’s Investor Services Pty Limited (Moody’s); and

(f) S&P Global Ratings Australia Pty Ltd (S&P).

In doing so, it noted that Fitch, Moody’s and S&P accounted for 99 per cent of ratings outstanding in Australia and contributed 90 per cent of the aggregate consolidated operating revenue (which totalled approximately $154 million) of all CRAs operating in Australia .