Regular followers of Financial Regulation Matters , and those interested in the development of the credit rating industry, know that there has been a concerted and purposeful effort from the rating agencies to integrate the concept of ESG (Environmental, Social, and Governance) into their credit risk assessments. This began with some takeovers of ESG-date providers, and was solidified, in theory, with the major rating agencies’ connection to the UN-supported Principles for Responsible Investment initiative (PRI). However, since then there have been a number of claims raised against the rating agencies, most noticeably concerning how the rating agencies transmit how they are considering ESG-related factors, and to what extent. Research has shown that, majoritively speaking, the agencies consider the “G” element to be the most ‘material’ aspect usually, with little being confirmed regarding the ‘materiality’ of the “E” and the “S”. Yet, with the recent events across the western world be...

In an article in The Financial Times yesterday, an issue was raised concerning the potential for the increase in the issuance of ‘social bonds’ to be negatively impacted by a concept known as ‘social washing’ . The fear is that instead of utilising the investments that the bonds are intended for, issuing entities will instead use those funds for other purposes, including balancing their books in these economically uncertain times. The article ends with the statement that until standards of disclosure and transparency increase to the level of the green bond marketplace, ‘investors may have to take it on trust that the money will be put to socially useful ends’. However, this is not how the marketplace is supposed to work in the modern environment; credit risk is not supposed to be determined by mere trust, but by the assistance of excruciating levels of data-driven analysis (although, of course, one cannot be 100% certain with regards to the accuracy of risk assessments). With this in ...

The Wirecard scandal has made for an engrossing account of corporate failure since the news emerged that the German financial payments processing company had been inflating its accounts. Now that the company has collapsed – the first time that a member of the German Dax index has failed – the ramifications are starting to be revealed. The EU is now investigating the role played by BaFin , the German regulator tasked with regulating the company, whilst the FCA in the UK has ordered the British arm of the company to freeze all of their customers’ accounts . Now that the aftermath is continuing to fold, the focus is now rightly turning to why the alarm bells were not sounded earlier by those both paid and expected to do so.   Of particular concern has been the auditing conducted by Ernst & Young (EY), and the credit rating conducted by Moody’s. With investors standing to lose out considerably because of this collapse, the performance of these gatekeepers is a massively impo...

There have been a number of developments recently with regards to the Securities and Exchange Commission receiving advice on how best to regulate the credit rating industry. Last month, a panel was convened so that the Investor Advisory Committee could hear from a number of experts on some of the issues facing the industry, and some potential solutions. Then, at the beginning of this month, the Credit Ratings Subcommittee of the Fixed Income Market Structure Advisory Committee (FIMSAC) produced a recommendation outlining three key areas for regulatory development. In light of this, this post will review the developments, and also examine whether the calls are realistic, or whether they may spurn the SEC into more action in this area.   The meeting of the SEC’s Investor Advisory Committee took place on the 21 st May, virtually – recording available here . In the afternoon, a panel was convened that was made up of: Professor Frank Partnoy of the University of California, Berkel...

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...

Simon Dingemans, the former finance chief for GlaxoSmithKline and long-term employee of Goldman Sachs, has surprisingly and abruptly quit his role as the Chairman of the Financial Reporting Council, less than a year after taking the helm. In this post we will look back at his tenure and find out why he has decided to move back into the private sector. We analysed Dingemans’ appointment late last year here in Financial Regulation Matters , where we discussed his taking aim at the auditing oligopoly that the FRC has responsibility for regulating. At the time, Dingemans stated that ‘ this is a rare opportunity to reform something so wholeheartedly ’, and he made the break-up of the ‘Big Four’ and their oligopolistic hold on the auditing marketplace a priority. However, since his appointment it has been business as usual. The regulator has continued investigating members of the oligopoly, whilst also calling on members to upgrade their auditing tools . This is nothing out of the ...

Late last year we discussed here in Financial Regulation Matters the news that Johnson & Johnson had been ordered to pay billions of dollars in damages for the side effects that talcum powder was causing. It had been suggested at the time that the spate of litigation could end up costing the giant conglomerate more than $20 billion and, just today, the news broke that the company would cease selling the product in the US and Canada. The talc-related saga for J&J is a long one. There has been a vast number of legal actions taken against the company, with a number of claimants being awarded large amounts, with one claim leading to $417 million in damages being awarded , and in another $4.7 billion to 22 women in the US . Interestingly Forbes said recently that J&J stock may be undervalued , but that may be about to change. The Financial Times is leading the way with the reporting that the company has dropped the sale of the product in the North American market , al...

Today’s short post is a short report on the news that S&P Global have today launched their new ‘ESG Scores’ into the marketplace. The move is the latest by the leading credit rating agencies to stake their claim to the ever-growing need for ESG-related information. The leading credit rating agencies, and the ‘Big Two’ of S&P and Moody’s have been making a concerted effort to increase the stake in the growing ESG-informational provider field. With S&P acquiring TruCost, and Moody’s acquiring Vigeo-Eiris, amongst other moves, the trajectory is perhaps set. I have argued elsewhere that this may result in particular outcomes for the current ‘sustainability rating industry’, and that trajectory is being proven all the time. Morningstar, earlier this year, purchased Sustainalytics outright . Moody’s acquired a majority stake in one of the oldest ‘sustainability rating agencies’ Vigeo-Eiris early last year. On top of acquiring TruCost in 2016, S&P followed that up wi...

Today’s short post provides two updates from the credit rating industry, with each providing particularly contrasting fortunes for the agencies involved. Morningstar Settles with the SEC The first story today involves Morningstar, an agency that has been trying to really carve a position for itself in the oligopolistic rating market . Morningstar had reason to be forward-looking this year with its purchase of Sustainalytics being completed in April. The development of the ESG-mainstreaming project means this purchase puts Morningstar in a string position. However, yesterday Morningstar settled with the SEC with regards to charges that it had violated regulations relating to the elimination of internal conflicts of interest. Specifically, the rule that credit rating analysts should not be involved with the sales and marketing efforts of the agency had been violated . The cost of this settlement has been reported to be $3.5 million, but the details provide flagrant breaches o...

Today’s post is just a very short alert on the publication of a report today by the EU. The report, entitled ‘Thematic Report: EU CLO credit ratings – an overview of Credit Rating Agencies practices and challenges’ is available here . The aim of the report is to examine the rating practices that underlay the development of collateralised loan obligations, with a particular focus on how risk is identified and transmitted within the process. There is also a distinct focus on the stress-testing that the agencies undertake for these products, with ESMA stating in their press release that they ‘ expect CRAs to continue to perform regular stress-testing simulations and to provide market participants with granular information on the sensitivity of CLO credit ratings to key economic variables affected by the pandemic ’. Steven Maijoor, the Chair of the Regulator, went further and stated that the regulator’s assessments of the agencies’ practices in this particular sector ‘ highlight a numb...

In today’s short post, a nuanced point that is being overlooked by many in the business press will be discussed regarding the news that Liberty Global, the owner of the UK-based Virgin Media company, is in talks with Telefonica regarding the purchase of its ‘02’ brand. One of the issues that is arising out of this proposed merger, on top of the competition-based issues that will no doubt arise, is how it will be possible and, more importantly, why it will be possible when recent attempts to buy 02 (from a number of companies) have been ruled out on competition-based grounds. It was reported late last week that Liberty Global – the massive telecommunications conglomerate ran by John Malone that also owns Formula One – was in talks with the owner of 02 – Telefonica – regarding the purchasing of the company. The supposed merger would be a 50/50 split between Virgin Media and 02, and Liberty Global would need to make a payment to Telefonica to equalise the ownership. The move w...

In today’s very short post, an article in Global Capital is reviewed in relation to a recent post here in Financial Regulation Matters concerning the European Central Bank’s decision to accept now-junk status bonds as collateral. The article, published in yesterday’s edition of Global Capital , is entitled ‘ The ECB is now Europe’s foremost rating agency ’, and is based on the premise that the ECB’s decision has fundamentally altered the credit rating market in Europe. This is because ‘if the ECB thinks it’s good enough to buy or hold as collateral, then it probably is’. Furthermore, the article argues that ‘a credit opinion from the ECB is invariably going to be more accurate and more timely, given that the opinion will itself have a direct bearing on credit quality’. Finally, the article cites S&P’s decision not to downgrade Italy as evidence of this power shift towards the ECB and away from the rating agencies. However, if we return to last Thursday’s post, then we...

Today’s post reacts to the interesting article published recently in the Bond Buyer , entitled ‘ How the coronavirus is impacting perceptions of municipal credit, ratings ’. The article raises some very interesting points regarding the usefulness of credit ratings in the ‘muni’ marketplace, and also the impact that regulations on the disclosure and following of public methodologies may be having upon the position of the agencies. ‘Municipal bonds’ are simply bonds issues by a state, municipality, or county in order to finance any of its capital expenditure; this is similar to the process of generating sovereign bonds for countries, for example. However, with a number of major US muni issuers being hit with rating downgrades recently – including Illinois, New York, New Jersey, Connecticut, and the New York Metropolitan Transportation Authority – there are questions being raised as to how valuable these downgrades actually are. That concept is based on the understanding that a. t...