Credit rating agencies - lodging compliance report with ASIC

This is Information Sheet 147 (INFO 147). It is for credit rating agencies and other interested parties. It explains what information must be included in the annual compliance report that credit rating agencies are required to lodge with ASIC.

This information sheet explains:

• the requirement to complete a compliance report
• the compliance topics the report must cover
• what information must be included in the report
• how to lodge the report.

Completing a compliance report

All credit rating agencies operating in Australia must hold an Australian financial services (AFS) licence. As an AFS licensee, you must comply with the conditions of your AFS licence: see section 912A(1)(b) of the Corporations Act 2001(Corporations Act).

Under your AFS licence conditions, you must give to ASIC a report (compliance report) that includes the information, statements, explanations or other matters specified by ASIC in writing relating to your compliance with the International Organization of Securities Commissions’ Code of Conduct Fundamentals for Credit Rating Agencies (IOSCO Code), arrangements to monitor and update credit ratings, and training requirements for representatives.

You must give the compliance report to ASIC for the following periods:

• for each financial year, at the same time you are required to lodge a balance sheet under Part 7.8 of the Corporations Act
• for any period of time ASIC requests, by the date we reasonably request in writing the report to be lodged.

We expect you to keep records to support any answers you provide as part of your compliance report. You may be required to produce such records on demand.

Compliance topics

Your compliance report must address the following topics drawn from the IOSCO Code, issued in March 2015, and your AFS licence conditions.

In preparing your compliance report, you should be guided by the four objectives of the IOSCO Credit Rating Agency Principles:

• Quality and integrity of the credit rating process – Credit rating agencies should endeavour to issue opinions that help reduce the asymmetry of information among borrowers, lenders and other market participants.
• Independence and conflicts of interest – Rating decisions should be independent and free from political or economic pressures and from conflicts of interest arising due to the agency’s ownership structure, business or financial activities, or the financial interests of the agency’s employees. Credit rating agencies should, as far as possible, avoid activities, procedures or relationships that may compromise or appear to compromise the independence and objectivity of credit rating operations.
• Transparency and timeliness of ratings disclosure – Credit rating agencies should make disclosure and transparency an objective of their ratings activities.
• Confidential information – Credit rating agencies should maintain in confidence all non-public information communicated to them by any issuer, or its agents, under the terms of a confidentiality agreement or otherwise under a mutual understanding that the information is shared confidentially.

IOSCO Code topics

1. Quality and Integrity of the Credit Rating Process
   1. Quality of the Credit Rating Process
   2. Integrity of the Credit Rating Process
2. CRA Independence and Avoidance of Conflicts of Interest
   1. General
   2. CRA Policies, Procedures, Controls and Disclosures
   3. CRA Employee Independence
3. CRA Responsibilities to the Investing Public, Rated Entities, Obligors, Originators, Underwriters, and Arrangers
   1. Transparency and Timeliness of Credit Ratings Disclosure
   2. The Treatment of Confidential Information
4. Governance, Risk Management and Employee Training
5. Disclosure and Communication with Market Participants

AFS licence topics

6. Arrangements to Monitor and Update Credit Ratings
7. Training Requirements for Representatives

What information must be included

For each of these topics, your compliance report must provide a narrative description of any implemented measures that have the aim of ensuring compliance with the associated IOSCO Code provisions or AFS licence conditions, as well as details of the testing and validation of those measures. A licensee's obligations under the IOSCO Code and the measures adopted by the licensee should be appropriate to ensure compliance with those obligations, taking into account the size, scale and complexity of the licensee's business.

The description should:

• for each topic, be clear, concise and of a reasonable length given the complexity of the description or topic. We consider that a length of five pages or less will generally be appropriate
• include a summary description of any measures (such as policies, guidelines, procedures or business arrangements) you have in place, including an explanation of how the relevant measure is intended to ensure, as far as is reasonably practicable, compliance with the associated IOSCO Code provisions or AFS licence conditions
• provide practical details of the implementation, operation and testing of the measures you have established, including a description of:
  • the resources allocated to the measures, including the internal compliance resources
  • any testing and reviews of the measures that have been or will be conducted and the results of those tests and reviews, including the name and title of the person who conducted the review or testing, information demonstrating whether the reviewer was independent of the business units that are principally involved in the determination of credit ratings, any observations and outcomes of the review and testing, and details of any recommended material changes and whether those recommendations have been implemented
  • any failings of the measures against their aims and an explanation of how those failings have been or will be addressed, including the date of the failure and its period of duration, the date you became aware of the failure, how the failure was identified, the steps you have taken or propose to take to address the failure and the risk of reoccurrence, and whether the failure resulted in any changes to corresponding ratings models or methodologies or any controls, policies or procedures
  • the results or outcomes of any reviews and action plans that had been identified previously and subsequently implemented during the period covered by the compliance report
• where a measure necessarily involves the disclosure of information (e.g. because the disclosure is mandated by the IOSCO Code), include a hyperlink to such disclosed information. This information should be available to the public
• for Topic 2 (CRA Independence and Avoidance of Conflicts of Interest), include:
  • a list of ancillary businesses that you operate, an explanation of why you consider these businesses to be ancillary businesses, whether the ancillary businesses may present a conflict of interest with your ratings business, and whether the ancillary business is operationally, legally and/or physically separate from your ratings business. This information should be available to the public
  • an attachment listing any actual or potential conflicts of interest that may influence the opinions and analyses you make or the judgement and analyses of the individuals you employ who have an influence on ratings decisions. This information should be available to the public.

Where relevant, your response on a topic may cross-reference to your responses on other topics.

Your compliance report must be signed by a director and your compliance manager, each declaring that the report is accurate and fairly represents all the matters that must be included in the report, as specified.

Where you are required to report on your ’credit rating process’ and ’credit rating methodologies’ under the IOSCO Code, we consider that this is not intended to require reporting of confidential or sensitive business information, but rather is intended to be a general description of the ratings process. We consider that these definitions encompass the types of information you use in developing your ratings, but do not necessarily require reporting of any specific piece of information you rely on for a particular rating.

Lodging the report

You can lodge your compliance report:

• by email to CRAreports@asic.gov.au
• by post to: Senior Executive Leader, Market Infrastructure, GPO Box 9827, Melbourne VIC 3001
• in person at any ASIC office.

Your compliance report for each financial year must be given to ASIC within four months of your financial year end.

Where can I get more information?

• Email CRAreports@asic.gov.au.
• Contact ASIC on 1300 300 630.

 

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations.

You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.