Finance: Credit Rating Agencies

Lord Giddens Excerpts

Wednesday 14th March 2012 Lords Chamber

Asked by

[Lord Giddens]

To ask Her Majesty’s Government what is their assessment of the influence exercised by the credit rating agencies in the world ewDebaeconomy.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, investors value the role of credit rating agencies to provide market participants with a neutral opinion of credit quality. However, to reduce the procyclical effects of ratings changes, it is important that market participants do not rely mechanistically on credit rating agency opinions and that those ratings are not hardwired into legislation. Therefore, the Government strongly support G20 efforts to reduce the overreliance on credit rating agency ratings, and fostering competition through reducing barriers to entry.

[Lord Giddens]

I thank the Minister for that Answer. In the excellent report that was produced in this House, a whole range of proposals were made for the reform of the credit rating agencies, which I see as urgent and important for the world economy. One of those proposals was that the cartel of the big three agencies should be opened up to greater competition. How in practice does the Minister think this will be achieved? Has any progress been made to that end? Does he by any chance support the idea of compulsory rotation with some of the smaller agencies, a proposal that has been endorsed by a Treasury Select Committee inquiry that is going on at the moment?

[Lord Sassoon]

The noble Lord, Lord Giddens, has gone absolutely to the heart of the matter. Certainly your Lordships’ Committee, the Government and most commentators would like to see competition introduced, but that is extremely difficult, as the noble Lord knows. It is a highly concentrated industry and entry is difficult because it takes time to build up a track record. A number of steps need to be taken. As I have already said, the hardwiring of credit ratings needs to be taken out wherever possible from investor mandates and from legislation and regulation in many countries.

We need to improve the transparency and comparability of the ratings of the agencies and generally lower the regulatory barriers to entry. I believe that Europe has taken some steps, but it needs to take more. For example, under the new registration processes, 16 credit rating agencies are already registered in Europe and another 15 more have applied to be registered, so there are a lot more out there already than the three that get all the focus. As to rotation, it is actually part of one of the two rounds of European directives that have come in since the financial crisis that analysts need to be rotated within firms, which is probably the proportionate response.