UK Conduct Regulator publishes letter to its dear CEO to credit rating agencies | Shearman & Sterling LLP

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The UK’s Financial Conduct Authority has published a letter to the CEO addressed to credit rating agencies setting out its expectations for the actions rating agencies should take to minimize risk to consumers, market integrity and competition . The letter sets out FCA’s oversight priorities:

  • Rating process and methodologies: The FCA observes that there is an inconsistency in the standard of regulatory reporting by companies. The FCA will review the regulatory notifications it receives and perform spot checks on rating actions and methodology updates. It will take action against companies that fail to meet expectations.
  • Governance and oversight: Companies should have good conduct risk frameworks and effective mechanisms in place to identify risks of harm. The FCA will assess the effectiveness of board oversight of governance as well as internal control structures and senior management skills.
  • Market and scope risks: The FCA observes that the CRA market is concentrated in a small number of large companies but that smaller companies also play an important role in providing alternative advice. Rating agencies are also increasingly carrying out activities outside the regulatory scope, which could give rise to conflicts of interest. The FCA intends to promote competition in the market and will publish a report on the market share of UK registered rating agencies. It also plans to be proactive at the limits of the regulatory perimeter.
  • Operational risk and resourcing: The FCA observed that some companies were not reporting information security incidents and an increasing reliance on third-party vendors to provide aspects of the ratings process. The FCA will engage with the CRAs in the event of a significant operational incident and may take action against companies that do not notify them when such an incident occurs.

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