09-224MR ASIC outlines improvements to regulation of credit rating agencies in Australia
Thursday 12 November 2009
ASIC has outlined changes to the regulation of credit rating agencies in Australia.
From 1 January 2010, credit rating agencies will be required to hold an Australian Financial Services (AFS) licence. Under the AFS licensing regime, general licensee obligations set out in the Corporations Act will require credit rating agencies to:
manage conflicts of interest that may arise in their businesses;
have resources available (including financial, human and information technology resources) that are adequate for the nature, scale and complexity of their businesses;
ensure their credit analysts are trained and competent to be involved in the preparation of credit ratings;
ensure credit rating services are provided efficiently, honestly and fairly; and
have in place risk management systems.
Credit rating agencies that wish to give credit ratings for investment products offered to retail investors must also comply with a general licensee obligation under the Corporations Act to have a dispute resolution system comprised of:
an internal dispute resolution procedure; and
membership of an approved external dispute resolution scheme, such as the Financial Ombudsman Service.
An alternative to court actions, external dispute resolution schemes provide quick, low-cost, independent resolution of disputes between retail investors and AFS licensees up to $150,000 (increasing to $280,000 on 1 January 2012).
In addition to the general licensee obligations, ASIC will impose specially tailored conditions on AFS licences granted to credit rating agencies. These tailored licence conditions will require credit rating agencies to:
comply with the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies (on a ‘if not why not’ basis to 30 June 2010 and mandatory from 1 July 2010);
annually lodge with ASIC an IOSCO Code Annual Compliance Report;
disclose procedures, methodologies and assumptions for ratings;
have in place arrangements to monitor and regularly review credit ratings;
review ratings affected by material changes to rating methodologies within six months of the change;
have in place training program for credit analysts that have been externally assessed as adequate and appropriate (to take effect from 1 July 2010);
refrain from ‘notching’ credit ratings for an anti-competitive purpose (e.g. with an anti-competitive purpose, threatening to issuer a lower credit rating for a structured finance product because an asset underlying the product is not also rated by the credit rating agency); and
consent to information sharing between ASIC and foreign regulators.
These improvements will in substantial respects align Australia’s regulation of credit rating agencies with International Organization of Securities Commissions (IOSCO) principles and with regulation passed or proposed in major markets such as the United States, Europe and Japan.
Following an announcement by the Australian Government in May 2008, ASIC and Treasury conducted a review of the Australian regulatory framework for credit rating agencies.
On 13 November 2008, the Government announced that ASIC would remove an AFS licensing exemption held by credit rating agencies and require them to hold an AFS licence and that the new regime would come into force on 1 July 2009.
On 5 June 2009, Minister Sherry announced a short extension of the licensing timeframe to no later than 1 January 2010 to allow ASIC and Treasury to conduct further consultations with the CRAs and industry concerning developments in Europe and the US. On 13 August 2009 ASIC hosted a roundtable discussion involving Treasury, credit rating agencies and industry associations representing buy-side and sell-side interests.
The general licensee obligations under the Corporations Act are principles-based and designed to apply in a flexible way. For further information about general licensee obligations, see the following regulatory guides:
Regulatory Guide 104 Licensing: Meeting the general obligations (RG 104)