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Hefty fine for credit rating agency over conflict of interest breach

Apr 30 2019 21:05
Carin Smith

The Financial Sector Conduct Authority has imposed an administrative penalty of R487 000 on Global Credit Rating for contravening the Credit Rating Agency Rules.

The FSCA regulates and supervises the conduct of financial institutions in accordance with financial sector laws.

Global is a registered credit rating agency authorised in terms of the Credit Rating Services Act and subject to the FSCA's regulatory powers.

Conflicts of interest

The FSCA said in a statement on Tuesday that it found Global had failed to manage conflicts of interest in accordance with the rules when issuing a credit rating in November 2017.

This rating process was affected by Global's business interests to obtain a ratings tender from the issuer, the FSCA ruled. The issuer was not named in the FSCA order.

The FSCA emphasised that the case against Global relates to how the ratings agency dealt with conflicts of interest during the rating process.

The authority did not, however, investigate nor express a view regarding the relevant rating.

"On October 31, 2017 Global's CEO, whilst acting for Global and whilst the rules required him to operate separately from the rating analysis teams, undertook to an issuer, whose credit rating had expired, that Global would issue a credit rating, which would enable [the issuer] to continue to market a rating to its funders until the rating tender is awarded," the FSCA order states.

At the time the issuer was procuring through a tender process for the services of a credit rating agency. Global was one of the applicants.

Process compromised

The FSCA established that Global's credit rating process was compromised and was affected by Global's business interests to obtain a ratings tender from the issuer.

On December 5, 2017 the issuer awarded the tender for the provision of long and short-term national scale rating services to Global for a total of R487 000.

The FSCA found that Global contravened the act in that it failed to deal with the conflict of interest as prescribed by the FSCA rules.

When deciding on an appropriate penalty, the FSCA considered, amongst other aggravating factors, that a breach of the conflict of interest rules was serious, especially in the context of a credit rating agency.

Among factors mitigating the amount of the penalty, the FSCA took into account that Global did not dispute the allegations and that it cooperated with the authority during the enforcement process.

In setting the amount of the administrative penalty imposed on Global, the FSCA decided to use the contract value of the tender award in question, namely R487 000.

fsca  |  financial services  |  tender  |  credit ratings
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