The European Securities and Markets Authority has fined Fitch Ratings Ltd €1.38 million for a series of negligent breaches of the European Union's Credit Rating Agencies Regulation.

ESMA found certain senior analysts in Fitch transmitted information about upcoming rating actions on sovereign ratings to senior people in Fitch's parent company before it was made public. The trans-border regulator also found that Fitch did not have proper internal controls in place to ensure that it could give a rated entity the minimum time period to consider and respond to a rating action before making it public. Fitch failed to allow Slovenia 12 hours (the minimum required period at the time) to consider and respond to the downgrade of its sovereign rating in 2012, as required under the Credit Rating Agencies Regulation.

Fitch’s contraventions of the regulation

ESMA carried out a review of the sovereign rating processes of a number of rating agencies in 2013, focusing on the period between 1 September 2010 and 25 February 2013. It concluded that Fitch might have infringed against the regulation in several places.

Unauthorised disclosures of information on new and potential sovereign rating changes

Between 1 December 2010 and 7 June 2012, some senior analysts at Fitch transmitted information about upcoming rating actions on sovereign ratings to certain senior figures at Fimalac SA, which was a parent company of Fitch. Under the CRA Regulation it is prohibited to disclose information on upcoming rating actions to other persons than those involved in the production of the relevant credit ratings or the rated entity. In the period concerned there were nine separate sets of email exchanges concerning actual or potential upcoming rating actions relating to six countries - Greece, France, Ireland, Italy, Portugal and Spain. ESMA found that Fitch had transgressed in respect of those email exchanges between 1 June 2011, the date of the entry into force of the infringement provisions in the CRA Regulation, and 7 June 2012.

Lack of sound internal controls to support compliance with the 12-hour rule

Between 1 June 2011, the aforementioned date of the infringement provisions, and 14 February 2012, Fitch’s internal controls for the purpose of complying with the 12-hour rule fell short in the following ways:

• it provided unclear guidance to staff on the subject;
• the people responsible for supervising compliance with the 12-hour rule within the sovereign and international public finance group did not exercise their control functions;
• the internal control functions did not detect this absence of control; and
• follow-up action taken by the internal control functions did not detect and adequately address these shortcomings.

Failure to comply with the 12-hour rule

On 26 January 2012, Fitch informed the representatives of Slovenia of its intention to downgrade its sovereign rating for Slovenia, without offering any information on the grounds for the intended downgrade. Only on 27 January did Fitch send that information to Slovenia’s representatives who made it known that, in accordance with the CRA Regulation, they expected to be granted 12 hours from the time of receipt to assess the information. Fitch proceeded with the public announcement of the downgrade approximately three hours after its transmission of the grounds of the rating action to Slovenia.