S&P Censured on French Rating Gaffe at Height of Crisis

Standard & Poor’s was censured by its European Union regulator for a mistake in 2011 that led to it incorrectly announcing a cut in its rating for France’s sovereign debt.

The European Securities and Markets Authority said today that the “incident was the result of a failure by S&P to meet certain organizational requirements” of EU law. The announcement marks the first time that ESMA has officially named a credit-ratings company since it became the industry’s watchdog in 2011.

S&P, a division of McGraw Hill Financial Inc., failed to properly follow EU requirements “relating to sound internal control mechanisms, effective control and safeguard arrangements,” ESMA said in a statement on its website.

The incorrect ratings-cut announcement on Nov. 10, 2011, roiled global markets for equities, bonds, currencies and commodities at the height of the euro area’s fiscal crisis.

Subscribers to a web-based service from S&P received an e-mail alert saying “France (Republic of) (Unsolicited Ratings): DOWNGRADE,” when no such step had been taken.

The error prompted fury from EU governments and the European Commission, with Michel Barnier, the EU’s financial services chief, labeling it a “very serious incident.”

ESMA said that S&P wouldn’t face further action beyond the public censure. The agency “took into account the steps taken by S&P to end the infringement and was considered proportionate to the seriousness of the breach.”

No Intent

ESMA’s board “considered that the evidence before it did not allow it to conclude that S&P had committed the relevant infringements intentionally or negligently,” meaning the error isn’t punishable by a fine, the regulator said.

“We welcome ESMA’s finding that there was no intent or negligence on S&P’s part in this incident,” Martin Winn, a London-based spokesman for the ratings company, said in an e-mail. “We publicly acknowledged the error at the time, which was unrelated to our ratings or ratings analysis. We have since enhanced our systems to safeguard against such an incident in the future.”

The error arose during an attempt to update some banking industry information in an internal database, according to the ESMA report.

“The investigation revealed a lack of effective oversight and responsibility” of handling the update, ESMA said in the report. “The relevant S&P staff appeared inadequately informed and did not demonstrate sufficient or necessary understanding.”

“The incident was not an isolated and inadvertent technological error but the result of a series of shortcomings,” ESMA said.