On 12 November 2024, the Financial Conduct Authority (FCA) published a letter to CEOs of credit rating agencies (CRAs), setting out its supervisory strategy for firms in that portfolio. The letter sets out the FCA’s view of the key risks in the sector, its expectations of CRAs and a summary of the work it intends to do over the next two years.

The FCA notes that it has seen some progress by CRAs in response to the risks identified in its previous portfolio letters, in February 2022 and October 2022, but flags that there is more to be done, particularly in the areas highlighted in the letter. CRAs’ boards are expected to play a key role in the oversight and consideration of these risks including any actions to address them. The FCA also emphasises that it considers a strong governance framework essential to ensuring CRAs deliver quality and independent ratings.

The letter highlights the following key supervisory priorities for the FCA in relation to CRAs:

  • Governance and oversight: The FCA expects CRAs to have implemented and put into practice the governance expectations outlined in its October 2022 letter and where there are still actions to be taken, that these are addressed without delay. In relation to oversight, the FCA expects firms’ internal control arrangements to robustly monitor the activities of their UK regulated entity (including risks arising from use of non-UK staff and operations). It also expects to see evidence of reporting to the board of clear metrics and risk assessments, any actions the firm is taking and evidence of board oversight of such actions.
  • Ratings process and methodologies: For risks related to ratings process and methodologies, the FCA expects the board to ensure compliance with the CRA Regulation. In particular, it expects to see improved evidence of oversight from internal control structures, senior management and the board, with a particular focus on the ratings process, adequate resources, methodology development and review, and regulatory reporting. The FCA plans to engage with firms to assess their end-to-end ratings and methodology processes.
  • Operational resilience: The FCA expects the board to ensure compliance with the CRA Regulation, including considering risks and controls, resources and capabilities, outsourcing and reporting. While the FCA’s policy statement PS21/3 on operational resilience does not apply directly to CRAs, the FCA suggests they consider it for suggestions on how to improve operational resilience.

The FCA also addresses market and perimeter considerations, including:

  • Competition: One of the aims of the CRA Regulation is to increase competition among CRAs by encouraging the use of smaller CRAs through the application of Article 8d. As part of its supervisory work, the FCA wants to better understand the effectiveness of Article 8d in promoting competition among CRAs.
  • Unregulated activities: The FCA notes that CRAs continue to be active outside the regulatory perimeter and expand their range of unregulated product offerings, such as credit assessments and private market products. It notes that it expects CRAs to have robust governance and internal control arrangements to ensure non-regulated activities do not impact negatively on the regulated business, and any risks should be monitored and mitigated with oversight by the board and senior management.
  • Environmental, social and governance (ESG) factors: Following the Government’s announcement in August 2024 that it plans to pursue the regulation of ESG ratings, the FCA flags that it is working closely with HM Treasury as officials develop the perimeter of that future regulation and that it will engage with firms to help inform its thinking on developing an appropriate regulatory framework for this market.

As the CRA Regulation is expected to be reviewed as part of the repeal and replacement of assimilated law under the Financial Services and Markets Act 2023, the FCA plans to use its supervisory findings to help inform that review and any subsequent changes to the regulatory framework. It intends to continue to engage with firms, advisers and other regulatory bodies as part of this.

The FCA asks CEOs to consider the issues in the letter and how to ensure they address them. CEOs are asked to discuss the contents of the letter with their senior management team and the board and be able to show their plans to meet the expectations set out in the letter.