A new proposal of European regulation intends to introduce civil liability of credit rating agencies towards investors.
While credit rating agencies have been in the spotlight since the subprime crisis and the European sovereign debt crisis for having potentially delivered misleading credit ratings and created oligopolistic market situations, a lack of transparency and conflicts of interest, steps are now slowly but certainly being taken in order to ensure that credit ratings used in the European Union are independent, objective and of adequate quality.
Since 1 July 2011, the European Securities and Markets Authority (the “ESMA”) has been entrusted with the exclusive responsibility for the registration and supervision of credit rating agencies in the European Union under Regulation 1060/2009 on credit rating agencies, as amended from time to time (the “CRA Regulation”).
In the event of infringements by the credit rating agencies of the CRA Regulation, the ESMA is empowered to take supervision measures, including in particular to require the credit rating agencies to bring the infringement to an end, suspend the use of a credit rating for regulatory purposes, temporarily prohibit the credit rating agencies from issuing credit ratings and even withdraw the registration of the credit rating agencies. The ESMA is also empowered to impose fines or periodic penalty payments when it considers credit rating agencies have, intentionally or negligently, committed an infringement of the CRA Regulation.
Taking into account those two major measures accorded to the ESMA, it could be argued that the CRA Regulation already provides sufficient incentives for credit rating agencies to comply with the requirements of the CRA Regulation.
However, it could be questioned whether investors are now in a better situation. Indeed, the possibility of sanctioning credit rating agencies is not a substitute for an efficient right of redress for investors who could suffer losses brought about by misleading ratings.
It would be much more efficient to introduce in the CRA Regulation a provision ensuring civil liability of credit rating agencies in the event they intentionally or with gross negligence commit an infringement of the CRA Regulation.
This is the purpose of the new proposal of European regulation of 15 November 2011. The willingness to protect financial markets and investors would then definitively be demonstrated. As mentioned above, steps are already being taken but we are still at the parting of the ways.