Fitch Ratings, a global leader in credit ratings and research, has inked a partnership with a French artificial intelligence startup as it endeavors to improve its early detection of bank misconduct risks after years of contemporaneous scandals. Fitch last year helped lead a $6 million funding round for Paris-based Sigma Ratings Inc., which runs a global risk intelligence platform. It is now a minority owner of the business.
The Big Three credit-rating agencies – Standard & Poor’s, Moody’s Investors Service and Fitch Ratings – have faced intense legal scrutiny and regulatory pressure following their role in the 2008 financial crisis and the Great Recession. These agencies were heavily criticized for not only failing to warn investors of the dangers of investing in risky mortgage-backed securities but benefiting by not pointing out the deficiencies.
The rating agencies are still trying to salvage their reputations by taking steps to improve their methodologies and transparency. By investing in Sigma Partners, Fitch will be able to conduct novel, dynamic and entity-level risk analytics in complex markets.
Regulatory scrutiny raises stakes for Fitch
Sigma is the world’s first non-credit risk agency that focuses on emerging markets using analytics that are not available anywhere else. It collects and quantifies specific operational risk data around compliance, governance and other non-credit risk factors.
Sigma Ratings was founded by Stuart Jones, a former senior U.S. Treasury official with tours in Afghanistan and the Middle East, and Gabrielle Haddad, a lawyer with emerging markets expertise.
The company’s AI-based technology combs through more than 30,000 news sources and 1,000 other databases – such as company registries – to conjure a list of 12 non-financial risk indicators and 18 types of risk events that can indicate potential governance risks and crime.
According to Jones, Sigma Ratings’ data set comprises of 750 million corporate entities and related people.
“What Sigma is doing is pretty unique, we’ve not seen it from another start-up,” said Ian Linnell, president of Fitch Ratings. “The way they deliver information through machine-driven analysis means it is more structured and efficient, rather than us having to go left, right and center to pick up on signals.”
“We want our ratings to be as predictive and forward-looking as possible,” he added.
Fitch Ratings’ announcement comes amid a series of misconduct at financial services companies in recent years, which has largely gone undetected by auditors, regulators, and investors. High-profile cases include the Wirecard accounting scandal, Wells Fargo cross-selling scandal, and Banske Bank’s money-laundering scandal.
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