UK FCA findings on credit rating agencies multi-firm review

The UK Financial Conduct Authority (FCA) has published findings from a multi firm review of credit rating agencies. The review focused on surveillance processes, credit rating methodologies and internal controls.

On surveillance and credit rating methodologies, the FCA made findings in relation to governance, capabilities, and how the process works. While the FCA drew attention to a number of areas where good practice was well-evidenced, it highlighted areas with room for improvement, including:

• On surveillance, clearer, better-interpreted and cohesive monitoring frameworks and practices (including on an ongoing basis rather than just in terms of the minimum requirement of an annual review), better evidence of analytical capability expectations and capacity management, and more fulsome documentation of first line controls, decision-making and oversight.
• On credit rating methodologies, effective annual reviews of key components of methodologies and model types, better governance of adjustments within methodologies and models, clarification of roles and responsibilities (including for independent non-executive directors), and better documentation, feedback and oversight in relation to methodologies and models.

On internal controls, good practices included comprehensive compliance reporting to the board and independent non-executive directors, strong compliance capability and understanding of the rating process, direct observation of rating committees by compliance staff, and remuneration structures supporting the independence of control functions. Areas for improvement included compromised independence of compliance reporting lines, limited compliance oversight of first line control design (including error frameworks and surveillance policies), procedural rather than substantive monitoring (particularly of commercial interests and conflicts), and weaknesses in regulatory reporting.

Firms are advised to reflect on how these findings apply to their business and consider adopting relevant good practices as well as addressing any areas for improvement. The FCA will continue to engage with firms and may undertake spot checks. The webpage also includes an annex setting out FCA expectations on how credit rating agencies should disclose environmental, social and governance factors.

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