Disclosure of credit ratings in Australia

This information sheet (INFO 99) is for credit rating agencies (CRAs) and issuers of financial products to retail and wholesale clients.

It explains:

To assist issuers, companies and CRAs, this information sheet also provides examples of disclosures of credit ratings, issued by a CRA with a wholesale authorisation.

Requirement to hold an AFS licence authorisation

All CRAs operating in Australia must hold an AFS licence authorising the CRA to provide financial product advice by issuing a credit rating. A CRA may choose to apply for a licence that either authorises it to provide advice to:

  • retail and wholesale clients (retail authorisation), or
  • wholesale clients only (wholesale authorisation).

These terms are defined in section 761G of the Corporations Act 2001 (Corporations Act).

When a credit rating may be disclosed

The type of AFS licence authorisation a CRA holds determines when a credit rating may be disclosed: see Table 1.

Table 1 When a credit rating may be disclosed

 Type of disclosure

CRA holds a   retail authorisation

CRA holds a   wholesale authorisation

Disclosure by an issuer of a credit rating in a retail prospectus or a PDS

Yes

No

Disclosure by a company of a credit rating in a continuous disclosure   announcement

Yes

Yes

Other disclosure of a credit rating in a manner that could reasonably be regarded as being intended to influence a retail client

Yes

No

A CRA that holds a wholesale authorisation must ensure that its credit ratings are not disclosed (and restrict a third party from disclosing its ratings) in a manner that could reasonably be regarded as being intended to influence a retail client in making a decision about a financial product: see section 766B and ASIC Information Release (04-78) ASIC grants relief for secondary financial service providers.

If you provide a financial service to a retail client through an intermediary (a secondary service), see also Information Sheet 141 Dealing and providing custodial or depository service as secondary service (INFO 141).

Disclosure of a credit rating in a retail prospectus or PDS

An issuer must only cite a credit rating in a retail prospectus or PDS if the CRA has consented to the credit rating being included in the form and context in which it appears: sections 716(2) and 1013K. (ASIC withdrew its ‘consent to quote relief’ in 2009: see ASIC Advisory (09-225AD) ASIC gives credit ratings agencies improved control over ratings use.)

However, if an issuer omits a credit rating in a retail prospectus or PDS because the CRA has not given consent, an issuer will not breach:

  • its disclosure obligations (including sections 710(1) and 1013E)
  • the prohibition against misleading or deceptive conduct, or
  • its general AFS licensee obligations (including its obligation to ensure financial services are provided efficiently, honestly and fairly).

See Mildura Co-operative Fruit Company Limited [2004] ATP 5; Perpetual Executors and Trustees Association of Australia Ltd v FCT (1948) 77 CLR 1 at 29; and Refrigerated Express Lines (A/Asia) Pty Ltd v Australian Meat and Livestock Corporation (1980) 29 ALR 333 at 347.

Disclosure of a credit rating in a continuous disclosure announcement

A disclosing entity must comply with its continuous disclosure obligations by disclosing to the market a credit rating when it considers the rating to be material and price sensitive information: section 674.

A disclosing entity may publish its continuous disclosure announcements on its website alongside shareholder information.

To the extent that contractual arrangements purport to prevent a disclosing entity from complying with its continuous disclosure obligations, they would be unenforceable by a CRA against the disclosing entity.

Disclosure of a credit rating in a manner intended to influence a retail client

A credit rating must not be disclosed in a manner that is intended to (or could reasonably be regarded as being intending to) influence a retail client in making a decision about a financial product, unless:

  • required by the Corporations Act (e.g. to meet continuous disclosure obligations), or
  • the credit rating was issued by a CRA that holds an AFS licence with a retail authorisation.

Whether such an intention exists is a question of fact to be determined by the person considering the disclosure of a credit rating and by the CRA in considering restrictions on disclosure of its ratings by third parties.

Examples of disclosures of credit ratings

To assist issuers, companies and CRAs, we have developed examples (Table 2) of disclosures of credit ratings issued by a CRA with a wholesale authorisation.

Table 2: Examples of disclosures of credit ratings issued by a CRA with a wholesale authorisation

Example

Description

Wholesale offer documents

The credit rating may be disclosed in communications with wholesale investors, including wholesale offer documents.

An issuer is not required to obtain the consent of a CRA to cite a credit rating in an offer to wholesale investors.

Care should be taken to avoid presenting disclosure to   wholesale investors in a manner intended to influence a retail client’s decision about a financial product (e.g. a hyperlink from a webpage with a retail offer document to a webpage with a wholesale offer document).

Offers to foreign investors

An issuer may disclose credit ratings in its offer documents for foreign investors. Such disclosure could   not reasonably be regarded as being intended to influence an Australian retail investor’s decision about a financial product.

Marketing and other communications to retail clients

Disclosure of a credit rating is restricted (unless   required by the Corporations Act) because it could reasonably be regarded as being intended to influence a decision of a retail client about a financial product. For example, disclosure is restricted if it is part of:

  • advertising of deposit products, securities or   other financial products to retail clients, or
  • a page of a publicly available website frequented by depositors or other retail clients (such as the homepage or personal banking webpage).

Consideration should also be given to whether ‘brand   marketing’ could reasonably be regarded as being intended to influence a decision of a retail client about a financial product.

A person will not breach their disclosure obligations or   general AFS licensee obligations (including the obligation to ensure financial services are provided efficiently, honestly and fairly) by omitting a credit rating in marketing and communications to retail investors.

Annual reports and annual   general meetings (AGMs)

A company may disclose a credit rating in its annual report or AGM as part of meeting its reporting   obligations.

Communications with shareholders

A company may disclose a credit rating in standard   shareholder communications, such as quarterly reports and updates, in the usual manner. It may do this when the disclosure could not reasonably be regarded as being intended to influence a retail client in making a decision about a financial product.

Disclosing a credit rating on webpages designed for   institutional investors or continuous disclosure announcements could not reasonably be regarded as being intended to influence a decision of a retail client about a financial product (unless, for example, hyperlinks, are used to promote that webpage to retail clients).

Retail investor presentations

A credit rating should not be disclosed in presentations to an audience of retail investors when the disclosure could reasonably be regarded as being intended to influence a retail client in making a decision about a financial product.

Analyst briefings

A person may disclose a credit rating to equity analysts.

Unsolicited press coverage

We will not hold an issuer or a CRA responsible for:

  • unsolicited media coverage in which a rating is disclosed, or
  • an issuer answering an unsolicited question from the media about its rating, unless by giving the answer the issuer intends that the answer would influence a decision of a retail client about a financial product.

Investment manager strategies in PDSs

An investment manager preparing a new or replacement retail offer document may, and may be required to, include in the document a description of its investment strategy. A description may also be included in other promotional materials.

Where the investment strategy makes use of credit ratings,   care will need to be taken to ensure any reference to credit ratings is not misleading. For example, the responsible entity of a registered managed investment scheme should not misleadingly imply that sole reliance on credit ratings will satisfy the responsible entity’s duty to exercise the degree of care and diligence that a reasonable person in its position would, when exercising discretions about acquiring or disposing of financial products covered by the ratings.

In determining its investment strategy, an investment   manager may wish to consider the International Organization of Securities Commissions’ good practices on reducing over reliance on external credit ratings in the asset management industry: see Good practices on reducing reliance on CRAs in asset management, June 2015.

When the investment strategy depends on the investment manager’s discretion, rather than following an index, we do not anticipate   that any reference to the strategy would state or imply that any decision would be based solely on credit ratings, even if it refers to the application of a criterion based on credit ratings. For example, an appropriate description may be:

‘As manager, we invest in Australian and international bonds that we consider represent good value taking into account their potential reward and the risk, and we will not acquire bonds that do not have a credit rating of at least [a particular rating] from XYZ Credit Rating Agency Pty Ltd.’

Such descriptions would not involve disclosure of any   opinion about any financial product by the CRA. Rather, they merely indicate a criterion that the investment manager will apply, and therefore may not be the provision of financial product advice to retail investors, including by the CRA.

The investment manager who includes such a description in a PDS will need to ensure that they explain:

  •   the concept of credit ratings
  •   any particular rating referred to
  •   the limitations of ratings issued by CRAs.

This broadly means that the PDS should explain that the ratings are merely the opinion of that particular CRA about:

  • a certain degree of likelihood of the issuers of the rated securities to meet their debt obligations when they fall due, or
  • the likelihood of loss in the event of a default of the issuer of the rated securities.

The investment manager may also need to disclose, if   appropriate, that the ratings are intended to be used by wholesale investors only and should not be relied on by retail investors when making a decision about the product offered in a PDS. It may be appropriate to include some or all this information in the PDS by incorporation by reference: see Regulatory Guide 168 Product Disclosure Statements (and other disclosure obligations) (RG 168).

Any promotion of a product that includes a reference to a particular credit rating as one of the criteria for the product’s investment strategy will need to be balanced with equally prominent information about the limitations of ratings issued by CRAs and the risk of over reliance on these ratings as the basis for making investment decisions.

For advertising and other promotional materials outside   regulated offer documents, see Regulatory Guide 234 Advertising financial products and advice services (including credit) (RG 234). For example, care should be taken to avoid creating the impression that references to a credit rating imply that it applies to the investment   manager’s fund.

Retail prospectuses and PDSs   that are no longer in use

In most cases, publishing on a website retail prospectuses and PDSs that cite a credit rating but are no longer in use could not reasonably be regarded as being intended to influence a retail client in making a decision about a financial product.

Care should be taken to avoid presenting disclosure that is no longer in use in a manner intended to influence a retail client’s decision about a financial product (e.g. a   hyperlink from a webpage with a PDS to a webpage with a disclosure that is no longer in use).

Disclosure in takeovers

A person must only cite a credit rating in a bidder’s   statement or target’s statement in a takeover if the CRA has consented to the credit rating being included in the form and context in which it appears: sections 636(3) and 638(5).

A CRA must not consent to the inclusion of a credit rating in a bidder’s statement or target’s statement that is to be given to retail investors.

Where can I get more information?

Download:

  • MR 09-224 ASIC outlines improvements to regulation of credit rating agencies in Australia
  • 09-225AD ASIC gives credit ratings agencies improved control over ratings use
  • INFO 141 Dealing and providing custodial or depository service as secondary service
  • RG 168 Product Disclosure Statements (and other disclosure obligations)
  • RG 234 Advertising financial products and advice services (including credit)

Call ASIC on 1300 300 630.

Submit a question online at www.asic.gov.au/question.

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases your particular circumstances must be taken into account when determining how the law applies to you. Examples in this information sheet are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements.

This is Information Sheet 99 (INFO 99), reissued in June 2015. Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.

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Last updated: 20/10/2014 12:00