Ratings houses face tougher regulation

Ratings houses and credit ratings agencies operating in Australia are facing a much more onerous regulatory environment, with the Minister for Superannuation and Corporate Law, Senator Nick Sherry, outlining tough new rules.

Sherry used a speech to the National Press Club this week to confirm that Australian rating agencies will immediately lose their exemption from holding an Australian Financial Services Licence and said, more importantly, they would be required to file annual compliance reports with the Australian Securities and Investments Commission (ASIC).

He said the global financial crisis had put the role of rating agencies in stark relief.

“Rating agencies performed a gatekeeper function in the system by placing themselves, and their allegedly sound methodologies of risk evaluation, between the community of investors — whether that be big or small banks, pension funds or individuals — and the product in which they wished to invest,” Sherry said.

“The granting of a Triple A rating was actually meant to mean something to investors, however by the time the toxic instruments underwritten by sub-prime loans began collapsing under the weight of their bad debts, the value of such ratings were so low that we should perhaps pen a new term and describe them as ‘sub-prime ratings’.”

He said a global consensus for improved regulation of rating agencies had quickly formed and Australia has taken a global leadership position.

Sherry said the initiatives he had announced relating to ratings houses would cover off the quality and integrity of their ratings processes, their conflicts of interest management and their responsibilities to the investing public and issuers.

“If they don’t comply with these new requirements ASIC could take a range of steps, all the way to revoking their licences,” he said.