The FCA has published the results of its multi-firm review of how UK-registered credit rating agencies conduct surveillance on ratings, and the methodologies and internal controls they use.
It found that some firms pleasingly had a frequent, structured, monitoring programme with robust annual reviews and a positive culture for reporting detected errors. Others, though, had less clear frameworks and did not recognise that the annual review was supposed to be as thorough as the initial assessment. Some firms also had materiality threshold that may be preventing the full scale of errors from being reported and escalated.
The FCA liked to see that some firms had dedicated surveillance teams and independent and credible challenge at rating committees, but some other firms could not provide enough evidence on analytical capability expectation or capacity management and could not show enough engagement with the rated entities themselves. These firms also tended to lack strong procedures and systems for ongoing monitoring and the annual review.
On staffing, the FCA was pleased where it found appropriate experts in model development teams and actively engaged Boards, but less so where firms did not segregate roles and responsibilities effectively and did not have enough INED engagement.
On compliance, the best firms had comprehensive compliance reporting but in others there was not enough evidence of independence or depth of review. The FCA wants to see comprehensive frameworks, expertise and independent reporting lines.
The FCA, as ever, expects firms to read the report and consider their own practices against it. It has also included an annex setting out how it expects CRAs to disclose how they consider ESG factors in their methodologies and rating actions.