ESMA Fines Moody’s €3.7 million for Conflicts of Interest Failures
The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has fined five entities in the Moody’s Group, based in France, Germany, Italy, Spain and the United Kingdom, a total of €3,703,000 and issued public notices for breaches of the Credit Ratings Agencies Regulation (CRAR) regarding independence and the avoidance of shareholder conflicts of interest.
The five entities subject to the action are Moody’s Investors Service Ltd (Moody’s UK), Moody’s France S.A.S. (Moody’s France), Moody’s Deutschland GmbH (Moody’s Germany), Moody’s Italia S.r.l. (Moody’s Italy), and Moody’s Investors Service España S.A. (Moody’s Spain).
In a statement, the ESMA, which works to enhance investor protection and promote stable and orderly financial markets, stated that it believes it is crucial, to ensure independent good quality ratings and to protect investors, and that credit rating agencies (CRAs) carefully identify, and subsequently eliminate or manage and disclose conflicts of interest to avoid interference by shareholders with the rating process.
The CRA breaches related to:
- the issuance of credit ratings in violation of the ban on issuing new ratings on entities where a credit rating agency shareholder exceeds the 10% ownership threshold and/or is a board member of the rated entity
- failure to disclose conflicts of interests related to the 5% ownership threshold
- inadequate internal policies and procedures to manage shareholder conflicts of interest
All the breaches were found to have resulted from negligence on the part of Moody’s.
The largest fine, of €2,735,000, was imposed on Moody’s UK, for infringements related to the issuing of new ratings in violation of the ban related to the 10% ownership threshold; the lack of appropriate disclosure regarding shareholder conflicts of interests which occurred in 206 instances for 65 rated entities; a lack of adequate policies and procedures; a lack of appropriate and effective organisational and administrative arrangements and a lack of sound administrative, accounting procedures and internal control mechanisms.
For infringements related to a lack of appropriate disclosure regarding shareholder conflicts of interests, Moody’s France was fined €280,000, Moody’s Germany was fined €340,000 and Moody’s Spain and Italy were each fined €174,000
Moody’s has the right to appeal against the decision of the ESMA to the Board of Appeal of the European Supervisory Authorities.
The ESMA operates within the European System of Financial Supervision (ESFS) through active cooperation with the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), the European Systemic Risk Board, and with national authorities with competencies in securities markets (NCAs).