Fitch Ratings Receives a (European) Record Fine for yet another Conflict of Interest

In this short post, we will review the news from a couple of weeks ago that Fitch Ratings, the third member of the Credit Rating Agency oligopoly, has been fined by the European Securities and Markets Authority (ESMA) for breaching its conflict of interest-related rules, specifically with regards to its ownership.

Fitch Ratings is the third member of the rating oligopoly and, like S&P is not a public company. Therefore, its ownership structure is a little more opaque and difficult to accurately determine. We know that the firm is owned by the influential Hearst Group, but only after the Group increased its stake in the agency at the expense of previous majority shareholder, French conglomerate Fimalac, in 2014. It is in relation to the ownership of Fimalac that this current regulatory action relates. Yet, whilst most CRA-related transgressive behaviour revolves around weighted bias — weighted in relation to the power dynamics within the rating industry and its connection to issuers and investors — this particular transgression was far more obvious.

ESMA had been investigating Fitch’s ratings of a French Supermarket group called Casino. The investigation has now concluded that, in relation to its ratings of the Casino Group from 2013 to 2015, the agency had failed to ‘meet the special care expected from a credit-rating agency as a professional firm in the financial service sector’. This was because between 2013 to 2015, one of the supermarket’s Board — Marc Ladreit de Lacharriére — also owned a stake in Fimalac. As Fimalac was a majority owner of Fitch at the time, this conflict should have been declared; this is based on rules established in 2013 that states that nay shareholder with more than 10% in the agency must not sit on the board of a company the agency then rates. For not declaring and then removing the conflict, ESMA has fined Fitch Ratings a record fine of €5.1 million. According to the Financial Times, that fine covered three other breaches for similar violations.

What this episode does is bring into the limelight the potential for transgressive behaviour within the credit rating industry — it is not agency specific. In 2015 S&P was fined a record $1.5 billion, whilst Moody’s was fined $864 million. First time observers may think that this demonstrates this behaviour as only existing at the very top of the industry and, thus, creating a ‘duopoly’ instead of the oft-cited ‘oligopoly’. However, the truth is that Fitch provided documentary evidence detailing the transgressions of the other two instead of settling with CalPERS — the Californian pension fund that initiated the legal action against the Big Two — which tells us that they were not entirely guilt-free, but possessed the evidence needed to avoid being caught up with the Big Two. This current story tells us that it is the modern version of a ‘rating agency’ which is actually the transgressive vehicle, and not one particular agency. Fitch Ratings said, in response to the fine, that they are well aware of the European Regulations and acted in good faith. If this is true, then a record fine would not have followed. There are many transgressive industries within the financial sector, but the sheer consistency of transgressive behaviour from within the credit rating industry is remarkable, and shows no sign of abating.

Keywords — Credit rating, Financial Services, oligopoly, EU, @finregmatters