The European Securities and Markets Authority (Esma), the EU›s financial markets regulator, has fined the European rating agency Scope 2.2 million euro for breaches of the Credit Rating Agencies (CRA) Regulation. The penalty is for Scope’s failure to manage conflicts of interest adequately, involving both structural and specific non-compliance issues.
Scope Ratings, founded in 2012 as a European alternative to dominant US-based agencies like Moody’s, Fitch, and S&P, was investigated by Esma, revealing five breaches. These included deficiencies in policies and procedures for managing conflicts of interest, inadequate internal control mechanisms, and failure to disclose ancillary services provided to a rated entity.
In a brief reaction, Scope said that Esma’s findings were related to “a period in Scope’s history before 2021”. “The issues raised by Esma had no influence on individual ratings issued by Scope,” said a spokesman via email. ”Scope Ratings has rapidly addressed, and completely remediated the issues raised by Esma.”
Harming investors
Verena Ross (photo), Esma’s chair, emphasized that Scope’s non-compliance with obligations to avoid potential conflicts of interest undermines market functionality and harms investors.
“Scope failed to comply with their obligations when it comes to avoidance of potential conflicts of interest,” said Ross. “Esma places the protection of investors and the pursuit of stable and orderly markets at the core of its mission. Failures by credit rating agencies to properly identify, prevent and manage potential conflicts can damage the proper functioning of markets and create harm for investors.”
‘Structural failures’
The investigation found that Scope’s policies and procedures, internal controls, and organisational arrangements were insufficient, resulting in a 687,500 euro fine for “structural failures”. Additionally, Scope’s lack of proper identification, management, and disclosure of a potential conflict of interest concerning a specific individual led to another 687,500 euro fine. A further 135,000 euro fine was imposed for not disclosing ancillary services in a final rating report, highlighting transparency issues that could mislead investors regarding rating objectivity.
Overall, Esma’s action underscores the critical role of regulatory compliance in maintaining market trust and integrity. It serves as a stark reminder of the necessity for credit rating agencies to adhere to high conduct standards and the consequences of failing to do so.