Credit rating agencies (CRAs) need to beef up their governance, the U.K.’s financial regulator said in a letter to the firms’ CEOs.
The Financial Conduct Authority (FCA) sent a letter to the heads of all of the registered CRAs outlining the results of its oversight and governance reviews.
“Overall, it was clear that multiple CRAs can do more to benefit from the value that a well functioning board can bring to the strategic direction and oversight of an organization,” it said, noting that the issue is exacerbated by the fact that most CRAs operate globally.
“We think that strong board governance, clear board-level accountability and independent challenge are essential to ensure your organizations deliver independent ratings free from conflicts of interest,” it said. “We think there are gaps in this respect at some CRAs.”
The regulator’s concerns include worries with the composition of the rating agencies’ boards (such as ensuring that they are properly skilled and independent) and with the role of independent, non-executive directors in providing adequate oversight of credit rating policies and methodologies.
“We saw that some CRAs are not taking the necessary steps to maintain independence of the [non-executive directors]. This may be through a lack of an objective recruitment process or [non-executive directors] potentially being involved in credit rating activities,” it said.
The FCA also found issues with the efficacy of CRA boards.
“We saw differing levels of consideration at board meetings ranging from in-depth to superficial,” the letter said. “We saw instances where board members participated fully and actively but in others, we saw members leaving meetings before the conclusion of material discussions.”
The regulator said it expects all the rating agencies to consider its findings, and to take action to address any deficiencies.
Firms that continue to fall short of the FCA’s expectations will face possible enforcement action, it said.