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Standard & Poor's censured by EU watchdog for mistakenly downgrading France's credit rating in 2011

Out-Law News | 05 Jun 2014 | 3:51 pm | 3 min. read

Credit ratings agency Standard & Poor's had failed to meet some organisational regulatory requirements when it mistakenly announced that it had downgraded France's credit rating in 2011, the European Securities and Markets Authority (ESMA) has found.

However S&P did not act "intentionally or negligently" and therefore could not be censured by a fine, ESMA has said.

To censure S&P, ESMA has issued a public notice about the agency's error, which it said amounted to "infringements" of some elements of the EU Regulation on Credit Rating Agencies.

"ESMA found that this incident was the result of a failure by S&P to meet certain organisational requirements set out in the Credit Rating Agency (CRA) Regulation relating to sound internal control mechanisms, effective control and safeguard arrangements for information processing systems and decision-making procedures and organisational structures," said a statement by ESMA, which took over responsibility for the registration and supervision of credit rating agencies in the EU in July 2011. 

According to ESMA, S&P's infringement arose on 10 November 2011 when it erroneously released to subscribers of its web-based Global Credit Portal (GCP) an email alert which stated in its headline that “France (Republic of) (Unsolicited Ratings): DOWNGRADE”. In fact S&P’s credit rating of France had not changed.

GCP is one method which S&P uses to disseminate its credit ratings and other financial information products. One of the services it provides is an email alert function which subscribers can customise to receive alerts when certain information changes on GCP, such as a change in credit rating by S&P of a particular issuer.

According to ESMA, the internal database where S&P maintained its credit ratings was also used to store its Banking Industry Country Risk Assessments (BICRAs). BICRAs are not credit ratings but assessments of the banking systems in particular countries and have been published since 2006. S&P later decided to maintain BICRAs in the same centralised internal database as its credit ratings and to display BICRAs on GCP.

A statement by ESMA said: "The relevant technical specifications for this project treated BICRAs as ratings and no effective action was taken to address the implications this could have. This eventually led to the erroneous release when an attempt to change an incorrect display of France’s BICRA on GCP triggered an email alert stating in its header that the rating of France had been downgraded."

According to Reuters it took S&P almost two hours to rectify its mistake, a correction which saw the euro rise against the dollar.

The ESMA board of supervisors tasked with examining the case said that evidence did not allow it to establish that S&P "acted intentionally or negligently", a decision which would be required for the ESMA supervisory board to impose a fine.

The watchdog said: "ESMA, based on the provisions of the CRA Regulation, decided that the relevant breaches warranted a supervisory measure in the form of a public notice. The final decision on the supervisory measure took into account the steps taken by S&P to end the infringement and was considered proportionate to the seriousness of the breach."

S&P spokesman Martin Winn said the agency welcomed ESMA's findings that there was no intent or negligence on S&P's part in the incident, reported Reuters.

"We publicly acknowledged the error at the time, which was unrelated to our ratings or ratings analysis. We have since enhanced our systems to safeguard against such an incident in the future," Winn said, according to Reuters.

The decision on S&P is ESMA's first enforcement action against a rating agency since it took over responsibility for regulating such agencies in the European Union in July 2011. ESMA said the investigation into the November 2011 incident required some time to conduct because it was the first ever by the watchdog, in a process which required the case to be heard by an independent investigating officer, with a right of reply for S&P, said Reuters.

S&P is widely regarded as one of the world's "Big Three" rating agencies, said Reuters, along with Moody's and Fitch.

ESMA is the EU authority tasked with ensuring the "integrity, transparency, efficiency and orderly functioning of European Union securities markets", the watchdog said. ESMA is responsible for the registration and supervision of credit rating agencies in line with the requirements of the CRA Regulation. The agency has the power to take "appropriate enforcement action" where it discovers a breach of the CRA Regulation, and this ranges from issuing public notices to withdrawing a credit rating agency's registration and imposing fines. 

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