Japan's Financial Watchdog Tells S&P to Improve Rating System

Japan's financial watchdog has ordered the local unit of Standard & Poor to improve its system for verifying and updating credit ratings.


“Significant problems were identified with the company’s business operations from the perspective of the public interest and investor protection,” the Financial Services Agency said in a statement. Bloomberg reports that the regulator's investigative arm recommended action against S&P on Dec. 11.


According to the FSA, S&P failed to properly confirm information that would affect the ratings of synthetic collateralized debt obligations.


An Australian judge found the company liable for issuing misleading ratings on securities bought by municipalities ahead of the global financial crisis.


“This could significantly damage S&P as it harms the credibility of its ratings with investors and credit issuers,” Takao Saga, a professor at Waseda University in Tokyo, told Bloomberg. “Rating structured products generates a lot of income for the companies and this regulatory penalty will impact revenue.”


The FSA will require S&P to implement preventive measures for the problems its review identified and submit reports within 15 days of the end of each quarter, according to the watchdog’s statement. The regulator gave it until Jan. 18 to submit its first report.


The FSA order is a result of the first inspection of the company by the Securities and Exchange Surveillance Commission since S&P’s local unit registered in September 2010.


“We take this matter very seriously and sincerely apologize to clients and market participants for the issues that led to the recommendation and order,” S&P said.


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