Recasting Credit Rating Agencies’ Responsibility: Suggestions for Reform

Abstract

The credit rating agencies (CRAs) have become major players in the financial markets yet their reputations have been tarnished by certain assessments issued during the 2007-2009 financial crisis. There is therefore a clear need to regulate the practice of the highly influential, though at times inaccurate, ratings of these agencies. The overriding proposition is that CRAs should be liable for the issuance of inaccurate ratings. The analysis maps the contours of the legal aspects of the credit ratings market before addressing the major questions regarding a CRA’s modus operandi. It is argued that CRAs are capable of bringing about potential distortions in the financial sector, thereby resulting in a reduction in market confidence which, in turn, influences negotiations and expectations. In this regard, a civil liability regime for CRAs could constitute a system of investor protection over and above traditional regulation. The purpose of this thesis is to demonstrate that the present system for regulating CRAs in the US, the UK and the EU is defective in terms of information asymmetries, an absence of transparency, conflicts of interest and limited competition. The thesis considers whether an effective liability regime through the ‘estoppel rule’ could be a valid option in the case of CRAs. In this light, the thesis attempts to demonstrate that CRAs should be regulated having due regard to their potential systemic threat. Further, the thesis suggests that CRAs should be subject to professional standards similar to those applicable to other information intermediaries such as auditors and financial analysts. The idea is that CRAs should be made responsible for their investment certification because of their fundamental role in the evaluation of credit risk and their influence on confidence and decisions in the market. The research brings forth a range of recommendations aimed at reforming the current regulatory framework