Compliance engagement low with rating agencies

An ASIC report released on Thursday examined six major credit rating agencies (CRAs); Moody’s Investor Services, S&P Global Ratings Australia, Equifax, Fitch Australia, Australia Ratings and AM Best Asia-Pacific.

The boards of CRAs, which are expected to establish and maintain compliance requirements of its Australian Financial Service Licence, did meet periodically, but ASIC found that board engagement varied for the credit ratings agencies surveilled.

“In half of the cases, boards were receiving comprehensive information on compliance matters from their compliance teams,” the report acknowledged.

“However, in other instances: 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.

“Another board did not meet to discuss compliance matters, and instead relied on committees to conduct these activities.

“And 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.”

ASIC found that the CRA board was “ultimately responsible” for ensuring compliance and recommended that the board “meet regularly” for this purpose.

Speaking to the parliamentary joint committee on Friday in his first public appearance, new ASIC chair James Shipton said, “The role and position of rating agencies is an important focus area in the financial system because they do perform and provide an important function.”

ASIC commissioner Cathie Armour noted in a statement that it was important CRAs “do not lose sight of their regulatory obligations in Australia”.

The regulator also made a number of other recommendations in the report, including the level of detail required in reports prepared by compliance teams and the adequate training of analysts based outside Australia.

It also recommended considering whether conflict of interest processes needed to be reassessed, and pointed to the provision of adequate information in annual compliance reports after the surveillance found “most” reports “did not provide sufficient information” on tests and reviews of measures in place to ensure compliance with codes of conduct.