ESMA fines Moody’s €3,7 million for conflicts of interest violations

Rick Steves

Moody’s UK was the most negligent and was fined €2,735,000 for the lack of appropriate disclosure regarding shareholder conflicts of interests which occurred in 206 instances for 65 rated entities.

Call for clarity of MiFid II rules across the industry

The European Securities and Markets Authority (ESMA) has fined five entities in the Moody’s Group a total of €3,703,000 for breaches of the Credit Ratings Agencies Regulation (CRAR) regarding independence and the avoidance of shareholder conflicts of interest.

The five entities are based in France, Germany, Italy, Spain, and the United Kingdom, and they were found to issue credit ratings on entities where a credit rating agency (CRA) shareholder exceeds the 10% ownership threshold and/or is a board member of the rated entity.

Moody’s failed to disclose conflicts of interests related to the 5% ownership threshold and had no proper internal policies and procedures to manage shareholder conflicts of interest.

Moody’s UK was the most negligent and was fined €2,735,000 for the lack of appropriate disclosure regarding shareholder conflicts of interests which occurred in 206 instances for 65 rated entities.

CRAs are banned from issuing ratings to companies with whom they share shareholders with more than 10% capital or are members of the board. CRAs are also required to disclose situations when they share the same shareholder holding 5% or more. Moody’s UK was not complying with these rules, ESMA found.

The other entities in France, Germany, Italy, and Spain failed to disclose shareholder conflicts of interests, which occurred in 72 instances for 36 rated entities, having not disclosed situations where a shareholder of a CRA holding 5% or more of the capital or voting rights of the CRA, holds 5 % or more of the capital or voting rights or is a member of the administrative or supervisory board of the rated entity.

Moody’s France was fined €280,000. Moody’s Germany was fined €340,000. Moody’s Italy and Moody’s Spain were fined €174,000 each.

In January 2020, ESMA decided to withdraw the registrations of certain UK businesses in light of the UK leaving the European Union, without a formal deal in place over financial services.

The agencies that have had their registration withdrawn include Fitch Ratings and Moody’s Investors Services, with trade reporting in procedure for FX firms also affected.

The removal of the registrations comes about because of rules within the EMIR, CRA and SFTR regulations, which demand that a firms registration be withdrawn if they no longer meet the criteria with which they were originally registered.

ESMA’s Credit Rating Agency(CRA) regulations mean that ratings issued by UK rating agencies can no longer be used in the EU without an additional endorsement from an EU domiciled agency though nearly all of the UK agencies put contingency plans in place for such endorsements well ahead of the December 31st deadline.

Credit ratings play a key role in determining lending decisions and the pricing and valuation of corporate bonds and government bonds. Given the steps that the UK based agencies have taken it seems likely that it will be something akin to business as usual for the likes of Moody’s and Fitch as far issuing ratings and upgrading or downgrading existing scores are concerned.

Another area that has fallen foul of the ESMA rulings is derivatives and securities financing trade reporting.

Counterparties to a reportable trade in EU instruments can no longer use a UK domiciled trade reporting venue. They must instead report to an established EU reporting venue.

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