Charlie and the toothless tiger
Jinfo Blog

1st December 2008

By Tim Buckley Owen

Item

Credit rating agencies will no longer be able to use the defence that their ratings are just opinions, if proposals by the European Union’s pugnacious Internal Market Commissioner Charlie McCreevy eventually become law. Instead, they would be made liable for breaches of EU rules, and could face having their EU licence withdrawn. It seems a far cry from the opinion expressed by the international law firm Barlow Lyde & Gilbert a few months ago http://www.vivavip.com/go/e9581 that it would be extremely difficult to hold the agencies to account in the courts for the outcome of dodgy ratings. Backed up by a legal principle enshrined in EU law that credit ratings are far from being simply opinions, suing them might become that bit easier. Commissioner McCreevy has little time for the International Organization of Securities Commissions’ current voluntary code of conduct, which he dismisses as a ‘toothless tiger’. Proclaiming his own approach as ‘ground-breaking’ http://digbig.com/4xxsp he also says that the EU will take the lead in seeking to convince its partners in the world's other major capital markets to move in a similar direction. In the United States, the Securities & Exchange Commission has already released the results of its own investigation into shortcomings in the main agencies' practices http://www.vivavip.com/go/e8839 disclosing some pretty alarming failings in the process. But with EU proposals claiming to go further than those of any other jurisdiction in the world, McCreevy will be pushing for his standards to become the global ones. Perhaps not surprisingly, the main rating agencies seem to be keeping mum for the moment; nothing on the topic had appeared among either Moody’s or Standard & Poor’s corporate press releases by the end of November. And Fitch’s chief executive officer Stephen Joynt http://digbig.com/4xxsq (registration required) simply welcomed the Commission's commitment to setting up an EU regulatory framework comparable to that in the US, and added that he was pleased to see a provision explicitly prohibiting interference by the regulatory authorities in the content of credit opinions. But the Economist is worried http://digbig.com/4xxsr that more regulation might actually have the opposite effect from the one desired – by giving the agencies even greater apparent special status. ‘Already they have too much power and influence,’ it says, adding that their special place in the financial system has created ‘an oligopoly that lulls users of their ratings into a false sense of security’. Instead, the Economist suggests, less regulation and more competition would give everyone the chance to get what they say they want: investors who think for themselves. Whichever way the pendulum eventually swings for the agencies – greater liability or less power – the implications for the information professionals who make use of their ratings could be profound.

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