Ratings companies fall short again

AAA rated – and even AAA+. In the world of finance and investing, those three little letters mean trust, quality and low risk. Or do they?

These letters also mean faster and bigger profits for the companies selling investments that have been given AAA ratings – and we all know what extra profits breed: greed and corruption.

Needless to say, this greed flows both ways: the company selling the investment and the credit-rating agency selling or providing the rating.

It’s not even 10 years since their reputations were trashed and the greed of credit-rating agencies was exposed in the Global Financial Crisis.

Their AAA ratings proved to be worthless and the investment products they rated, pure junk.

However, lessons have been learned – investors are wiser agencies are better, or are they?

The latest surveillance report by the Australian Securities and Investments Commission shows these agencies have not learned their lessons.

While the victims of their ratings shams have suffered and lost money, the agencies are chugging along raking in the profits. And once again it appears the staff and executives take their cue from the top, from the board.

Unfortunately the found boards are not their jobs properly.

According to the Australia’s six rating must do better.

For the first time, ASIC measured the companies against new international standards introduced in 2015. report doing

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The new code was designed to prevent the gross shortfalls in conduct and compliance identified by the GFC (yes, 2015 is belated but at least it’s now in place).

ASIC found governance by rating-agency boards was lacking. Half the boards did not receive full compliance information about their company’s activities.

One board met only once during the almost two-year surveillance period.

Another did not discuss compliance issues and instead relied on reports – reports from committees that did not have proper authority or any formal reporting-back arrangements.

“Compliance” might sound boring or nit-picking, but for a credit-rating agency it relates to every activity the company does.

That includes how the agency complies with its overall governance and management rules, its legal obligations on the quality and integrity of its ratings, and its compliance with being independent and free from political, economic or financial conflicts.

These issues are at the heart of the integrity of a rating agency, because people make investment decisions based on their ratings. To have board members and whole boards who either don’t know or don’t care about their legal obligations is appalling.

ASIC also found that “most” of the compliance reports produced regularly fell short. So even if these boards bothered to read them, they still wouldn’t be fully informed.

Of course, this doesn’t necessarily mean rating companies and their staff are doing anything illegal, but the point is that the boards don’t know either – never mind investors!