This multi-firm review focuses on the effectiveness and governance of rating committees (or committees) at UK registered credit rating agencies (CRAs). In line with our 2024 portfolio letter[1], we expect CRAs to maintain robust end-to-end ratings processes.
1. Summary
Rating committees are central to the quality of credit ratings. They need to be governed, constituted, conducted and overseen in a manner that ensures credit ratings are independent opinions of creditworthiness. Our review assessed purpose, people, processes, and internal controls. These findings are based on a multi-firm review of a sample of firms consisting of:
- desk-based analysis of CRA internal procedures
- engagement with analytical management and control functions
- observations of rating committees in mock and live settings
- review of regulatory notifications, and
- ongoing supervisory work
We are not setting new expectations. Our findings are intended to help firms understand those that already exist by highlighting both good practices and areas needing improvement.
2. Who this applies to
These findings apply to UK registered CRAs. They may also be relevant to those who use credit ratings or engage with CRAs such as issuers, investors, intermediaries, trade associations and regulatory bodies.
3. What firms need to do
UK registered CRAs should review these findings, evaluate their rating committee process and practices, and ensure that their internal control structures are effective.
4. Why we did this work
We supervise CRAs according to the EU Credit Rating Agencies Regulation[2] as amended by the CRA Regulations (EU Exit) 2019[3] (referred to collectively as the ‘UK CRA Regulation’). UK registered CRAs are required to establish, implement and maintain effective arrangements for sound corporate governance and internal control mechanisms to ensure credit ratings are independent, objective and of adequate quality.
Credit ratings are determined by ratings analysts and finalised through committee decisions, preventing any single individual from making unilateral decisions. Rating committees are therefore essential for ensuring consistent and appropriate application of methodologies.
As automation and Artificial Intelligence (AI) are increasingly deployed to support and enhance the ratings process, it will be important that credit ratings, which are defined as opinions of creditworthiness in the UK CRA Regulation, are based on analytical input. Further, innovation in the financial markets, such as digital bonds and private credit developments, may lead to additional risks which may need to be considered by CRAs in their ratings processes.
5. What we found
5.1. Purpose - Governance of rating committees
Rating committees are essential in assigning and reviewing credit ratings. They ensure that analytical inputs are incorporated by applying a relevant methodology through a collective decision-making process. We expect firms to operate rating committees with independence, consistency, and transparency, which supports investor protection and market integrity.
Good practices observed
- Role of committees for new ratings - For all firms, we observed that all new ratings were assigned by a rating committee, following a review of a defined set of committee materials, and based on published methodologies.
- Systems to support the process - Most firms had in-house systems that supported compliance to internal policies and the UK CRA Regulation, with controls to prevent unauthorised access to information.
- Governance framework - For most firms, we observed a three lines of defence framework, although with varying degrees of review and independence. This consisted of analysts supported by first line controls, second line risk and compliance functions, and third line internal audit.
Areas for improvement
- Policies and documentation - Some firms had defined rating committee terms of reference or had a charter in place, while others did not. In some cases, it was challenging to establish how the committee process may differ per asset class and if any deviations or exceptions to the process were permitted. Clear rating committee policy documentation will help to provide standard and transparent guidance to committee members and facilitate second and third lines of defence evaluation of the committee’s performance.
- Role of committees in surveillance - For some firms, policies required clarification for the use of committees in the assignment of preliminary ratings and their transition to final ratings, suspensions, withdrawals and affirmations.
- Email-based committees - Some firms had written procedures for email-based committees. The effectiveness of those committees should be reviewed to ensure robust discussion and decision making. We share further observations on the format of rating committee meetings in the next section.
5.2. People - Composition and role of rating committee members
We expect the composition of each rating committee to reflect the nature and complexity of the credit under review. They should include appropriately trained, experienced and independent analytical staff who have the capacity to meaningfully contribute. The Chair should facilitate objective discussions to apply the relevant methodology and encourage a culture of accountability and challenge.
Good practices observed
- Collective decision making - For all firms we met, rating committee decisions were made collectively with no individual holding veto rights.
- Analytical capability of committee members - All firms recognised the importance of ensuring adequate representation for more complex or novel credits. We saw evidence of this happening by the inclusion of more senior and experienced participants in those committees. We were told quorum requirements, such as minimum number and seniority, differed by asset class to reflect this.
- Training for committee roles - In some firms, in-house training was provided to rating committee Chairs.
- Systems to support member selection - Most firms had systems to identify eligible committee Chairs and voting members.
Areas for improvement
- Role of the Chair - The Chair’s role is to lead committee discussions objectively, and encourage appropriate challenge. Chairs should reflect on their approach to facilitation to promote a thorough and balanced discussion. We heard of examples when a committee Chair had discussions with the issuer about its rating prior to the committee meeting. Firms should consider if Chair involvement with issuers is essential. Should such situations arise, these interactions and rationale should be clearly documented and overseen.
- Member duties and monitoring conduct and culture risks - Clearly established frameworks for duties and code of conduct for members is central to the functioning of the rating committee – for example, members should participate from a location that ensures appropriate confidentiality. Despite having systems to support member selection, we saw instances of ineligible staff participating in committees, in breach of firms’ own policies, including regulatory requirements. Although codes of conduct or ethics documents were generally in place, we did not see measurable indicators to monitor conduct and culture risks in the committee setting.
- Quorum and exceptions - Firms should ensure that minimum quorum requirements are met. These should be clearly documented in committee policies with justifications on allowing committees to proceed without the minimum quorum.
5.3. Process – How the rating committee operates
Rating committees must apply methodologies consistently to uphold ratings quality. Our observations of both live and simulated committees highlight that outcomes may vary based on how a committee operates. To ensure application of methodologies, firms should consider measures to increase visibility, promote consistency and maintain standards.
Good practices observed
- Conflict of interest verification - Some firms had pre-committee conflict of interest checks in-built in their process, which were also reconfirmed by the Chair at the start of the meeting.
- Composition and capability - Meetings were composed of experienced staff, and generally facilitated by a Chair who was a senior executive. The rating recommendation was presented by the lead analyst, and supported by a more junior analyst in attendance.
- Voting procedure - We observed a good practice whereby voting was conducted in reverse order of seniority to avoid undue influence.
- Distribution and quality of committee materials - Committee materials were generally distributed prior to a committee within timelines established in firms’ policies and procedures, with no less than 24 hours. These materials covered a range of both qualitative and quantitative information, including model results.
Areas for improvement
- Format of meetings - Generally, we saw remote attendees participated less actively in meetings. Firms should ensure that the meeting format of the rating committee does not hinder the necessary level of challenge and depth of discussion as this could affect the quality of ratings.
- Evidence of challenge - Linked to the above, we observed limited challenge from individuals attending remotely. Most participation and challenge came typically from attendees attending the committee in person. Chairs should set the tone for inclusive participation, and be aware of the meeting format, dominant voices and more quiet members.
- Errors identification - Our desk-based review of errors reporting showed lags in the identification of errors in model or methodology application. This raises the question of the root cause for the time lag, such as failure to identify the error in the initial rating committee or the adequacy of the surveillance process.
- Analytical capacity of committee members - Under the UK CRA Regulation, firms are required to have sufficient analytical resources to issue and monitor credit ratings. From the committee meetings we observed, there were examples of Chairs asking if members had sufficient time to review materials indicating that adequate preparation is important for the committee discussion. CRAs should consider how they are monitoring that committee members have the capacity to review committee materials in the time allotted.
- Application of methodologies and deviations - We saw detailed credit discussions including peer analysis, however there were limited references to how the rating recommendations complied with the applicable methodologies. From our review of policies, we observed it was possible for rating decisions to be made that deviated from the methodologies. Firms should consider how they evidence committee discussions on the application of methodologies. Where deviations to the methodology are applied, these should be documented with a clear rationale.
- Issuer data quality - For some firms, we did not observe discussions on issuer data quality or information gaps. Analysis based on incorrect or incomplete data may affect ratings quality. Firms should consider how they are assessing and evidencing information quality standards in their overall ratings process.
5.4. Internal controls – Effectiveness of monitoring methods and tools
CRAs must establish and maintain effective internal control structures to prevent conflicts of interest and ensure independence of credit ratings. Based on the areas for improvement highlighted above, we expect CRA internal control functions, such as risk, compliance and internal audit, to review these findings and consider what changes, if any, should be considered to enhance their oversight of the rating committee process.
6. Next steps
Firms should reflect on how these findings apply to their business and consider adopting relevant examples of good practice. We plan to further engage with firms to assess the effectiveness of internal control structures for the rating committee. We will also look into surveillance processes which will include the role of the rating committee and other monitoring processes, and effectiveness of oversight by internal control structures.