Prompted to an extent by the Sovereign debt crisis earlier in 2010 the European Commission has been consulting on credit rating agencies CRAs. There is a concern over mechanistic reliance on external ratings by market participants and in regulation, and over lack of competition in ratings.
The ACT submission notes the import functions the credit rating agencies perform for issuers and investors in debt and others. Specifically:
- We agree that excessive hard coding of ratings within regulation can cause a herding effect that may be destabilising but would not want excessive prescriptions around this. We see the alternative of using CDS or bond spreads as inappropriate in regulation.
- We see no need to change the charging model for sovereign ratings, nor forcing free disclosure of the full sovereign rating reports
- We would view special central bank rating bodies as anti-competitive especially if their ratings were mandated in regulation, nor does a subsidised European Rating Agency help
- Civil liability would create a major barrier to new competition in the industry and would turn CRAs in credit insurers with huge cost implications for issuers
- In most cases the current issuer pays model does not really cause a conflict of interests
