ESMA imposes €3.7M fine on Moody’s
The European Securities and Markets Authority (ESMA) has imposed a fine of €3,703,000 on five entities in the Moody’s Group and issued public notices for breaches of the Credit Ratings Agencies Regulation (CRAR) regarding independence and the avoidance of shareholder conflicts of interest.
The breaches related to:
- the issuance of credit ratings (ratings) in violation of the ban on issuing new 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;
- failure to disclose conflicts of interests related to the 5% ownership threshold; and
- inadequate internal policies and procedures to manage shareholder conflicts of interest.
According to ESMA, all the breaches have resulted from negligence on the part of Moody’s.
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).
The infringements committed by Moody’s UK, for which it was fined €2,735,000, were:
- issuing new ratings in violation of the ban related to the 10% ownership threshold, in particular the prohibition to issue a new rating where a shareholder holding 10% or more of the capital or voting rights of the CRA also holds 10% or more of the capital or voting rights or is a member of the administrative or supervisory board of the rated entity;
- the lack of appropriate disclosure regarding shareholder conflicts of interests which occurred in 206 instances for 65 rated entities. Regarding the requirement to publicly disclose where an existing rating is potentially affected by a situation where a shareholder of a CRA holding 5% or more of the capital or voting rights of the CRA also holds 5% or more of the capital or voting rights, or is a member of the administrative or supervisory board of the rated entity;
- a lack of adequate policies and procedures. It was found that although Moody’s Procedure on Shareholding, aimed at avoiding the conflicts of interests, contained the legal ban to issue new ratings related to the 10% threshold, it also included an incorrect exception to the ban;
- a lack of appropriate and effective organisational and administrative arrangements, with significant shortcomings in the data source used to identify conflicts; and
- a lack of sound administrative, accounting procedures and internal control mechanisms.
Regarding the Moody’s entities in France, Germany, Italy and Spain, ESMA says each of them lacked appropriate disclosure regarding shareholder conflicts of interests, which occurred in 72 instances for 36 rated entities. These Moody’s entities were each fined the following amounts:
- Moody’s France – €280,000;
- Moody’s Germany – €340,000; and
- Moody’s Italy and Moody’s Spain – €174,000 each.