European Joint “Board of Appeal” (BoA) Rules Against Scope Ratings


The European Joint Board of Appeal (BoA) of the European Supervisory Authorities – the European Banking Authority, European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority – were recently asked to decide on an appeal from Scope Ratings regarding their recent penalty from ESMA – see here for the blog post on the penalty.

 

Yesterday, the decision was made and publicised. Scope had appealed upon the belief that the decision by ESMA to penalise them was not ‘well founded in law’. ESMA had contested that Scope had negligently applied its methodologies to a number of rating actions, whilst also failing to revise and update their methodologies accordingly, and summarily fined the agency €640,000. Specifically, Scope argued that Article 8(3) of the ‘CRA Regulation’ (EU/462/2013) had not been breached as ESMA had contested because the section of the regulation only concerns the design of the methodology, not the application. Furthermore, Scope argued that even if the regulation is concerned with application, it does not stretch to mean every stage of the methodological process because not every element of the methodology is necessarily relevant every time it is used.

 

Ultimately, the Board concluded that the contested decision – the financial penalty – was correct and that ESMA interpreted and applied the legislation correctly. The Board came to the conclusion that if market participants were unclear on the meaning of the legislation, and they argue that it is clear anyway, then they have plenty of opportunity to raise these concerns with ESMA. Also, the Board stated that the position of ESMA in relation to this methodological issue was made clear to the market, and was ‘reasonably foreseeable’ for market participants. Steven Maijoor, the Chair of ESMA, responded to the decision by stating that: I welcome the BoA outcome, which confirms ESMA’s decision in its entirety. It highlights important aspects based on several central provisions from the CRA Regulation such as ESMA’s duty as a supervisor to ensure that credit rating methodologies are not only designed in a systematic manner but also applied in a systematic way and reminds the high standard of care expected from CRAs’.

 

The decision can now be taken to the Court of Justice within the next 2 months if Scope decides to elevate the appeal, although it is unlikely given the unanimity displayed by the Board in reaching its decision.

 

Keywords – ESMA, Scope Ratings, credit rating agencies, @finregmatters

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