Scope Ratings Fined by ESMA

We have covered the European-based Scope Ratings a number of times in Financial Regulation Matters, here, here, and here. Also, recently the agency has received positive reviews in the financial press, with one outlet prescribing Scope Ratings as ‘the new challenger’ to the credit rating space, complete with a new approach. However, it was announced today that Scope Ratings had been fined by ESMA for a practice which is particularly familiar in the ratings arena – saying one thing and doing another.

 

The news broke this morning that ESMA had fined Scope for breaches of the Credit Rating Agencies Regulations (CRAR), to the tune of €640,000. ESMA also published a ‘public notice’ explaining the reason for the regulatory action. The regulator found that there were a number of breaches, with the fine being divided between: a failure to apply a methodology systematically (€550,000); and a failure to revise methodologies (€90,000). The action revolves around the time of 2015, a point in time which the regulator has since discovered that Scope adopted a particular ‘covered bonds methodology’ (CBM) and then never actually applied it. The methodology consisted of an analysis of an issuer’s strength, but also supposedly an analysis of the legal framework and also an analysis of the cover pool. Yet, when the ratings were issues Scope never actually applied this methodology properly even though it had declared it had, with the result being that ‘559 ratings [had been] issued without analysis being conducted according to the publicly disclosed CBM, our of a total of 622 ratings issued under the 2015 CBM’. Furthermore, ESMA also found that when changing to the 2016 version of the methodology, Scope did so without consulting the regulator nor, publicly at least, any stakeholders (in breach of CRAR).

 

Scope has the right to appeal against the decision, and it remains to be seen whether it will do so. Scope, for its part, has said that ‘at the time, Scope had inadvertently taken a different interpretation of relevant parts of EU legislation on credit rating agencies which turned out to be different from ESMA’s… since 2016, Scope has entirely remedied the issues identified by ESMA and reinforced its internal controls regarding he application of the relevant regulations’. The report from Nasdaq suggests that Scope have already made provisions for the fine, which suggests that it will not appeal.

 

Keywords – Scope Ratings, Scope, ESMA, regulation, business, @finregmatters


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