EU Credit Rating Agencies Enforcement Action: ESMA Fines Scope Ratings GmbH

Credit rating agencies (CRA) play a crucial role in financial markets by providing investors and creditors with evaluations of credit risk, helping them make informed decisions about lending, investing, or purchasing financial instruments.

However, the 2008 financial crisis also revealed significant issues with the credibility of these credit rating agencies, especially where they are paid by the issuers of the securities they rate, creating a conflict of interest and thus wrong incentives, such as providing favorable ratings to attract more business.

Regulation (EC) No 1060/2009 on credit rating agencies requires a credit rating agency to have an effective conflicts of interest policy in place. A CRA shall establish appropriate and effective organizational and administrative arrangements to prevent, identify, eliminate, or manage and disclose any conflicts of interest.

On March 22nd, 2024, ESMA, following this press release, fined Scope Ratings GmbH for inadequate and poor conflict of interest policies and procedures, inadequate to ensure compliance with its conflict of interest obligations under the CRA Regulation, and for not having internal control mechanisms adequate to ensure compliance with its obligations regarding conflicts of interest.

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