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ASIC questions credit rating agencies’ compliance robustness

ASIC questions credit rating agencies’ compliance robustness

The financial services regulator has highlighted some concerns relating to the compliance processes and management of conflicts of interests at some of Australia’s credit rating agencies.

In Report 566: Surveillance of credit rating agencies from the Australian Securities and Investments Commission (ASIC), the regulator considered the governance arrangements (including conflicts of interest and corporate structure), transparency and disclosure of Australia’s six credit rating agencies (CRAs):

  • AM Best Asia-Pacific Limited (AM Best)
  • Australia Ratings Pty Ltd (Australia Ratings)
  • Equifax Australasia Credit Ratings Pty Limited (Equifax)
  • Fitch Australia Pty Limited (Fitch)
  • Moody’s Investor Services Pty Limited (Moody’s)
  • S&P Global Ratings Australia Pty Ltd (S&P)

The surveillance, conducted between 1 January 2016 and 31 October 2017, resulted in several “observations and recommendations”, some of which seek to “improve compliance with their AFS [Australian Financial Services] licence obligations” while others call for change in the areas of board reporting, compliance testing, analytical evaluation of credit ratings, human resources, rating committee composition and annual compliance reporting.


Notably, the report found that only half of the CRA board were “receiving comprehensive information on compliance matters from their compliance teams”, and that, in one case, responsibility of engaging with the annual compliance report was “fully delegated to the chief executive officer” despite the conditions of a CRA AFS licence requiring the board to monitor this.

ASIC also called out the reviews of the CRAs’ compliance teams, stating that “most reports produced on a CRA’s compliance review did not provide sufficient information on the testing undertaken or the results of those tests and reviews”.

Conflicts of interest were also raised by the commission, noting that while CRAs had detailed documentation relating to managing conflicts of interest, it was “common practice for the analyst responsible for reviewing the rating and subsequently presenting their paper to a rating committee, along with their supervisor/manager, to also vote on the recommendation”.

“We query the appropriateness of the analyst who is presenting the recommendation having a vote at the rating committee, along with their relevant supervisor,” the report reads.

“We consider that this may compromise the robustness of the decision and may also be perceived as a conflict of interest, particularly where the rating committee is made up of only a small number of members.”

ASIC therefore recommended a series of changes, including:

  • agencies should review whether conflicts “can be practically managed” when an analyst that has made a recommendation, and their supervisor, vote at a rating committee — and consider whether changing their process would “lead to a more robust decision-making process”;
  • agency boards should “meet regularly to consider whether the CRA is complying with its licence”;
  • annual compliance reports should contain the required information, including sufficient information on the testing and reviews of the measures that are in place, and the results of those tests and reviews, and should be considered by the CRA’s board; and
  • CRAs should ensure that annual reporting on the training requirements includes information about persons based offshore.

ASIC commissioner Cathie Armour said: “CRAs play an important role in our market by giving market users — for example, investors, issuers and governments — a better understanding of credit risks and informing their investment and financing decisions.

“While many of the CRAs operate in a global market with global standards, it is important that they do not lose sight of their regulatory obligations in Australia.”

[Related: Bank receives first Fitch rating]

ASIC questions credit rating agencies’ compliance robustness


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