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March 7, 2012 11:06 pm
DBRS, the upstart Canadian credit rating agency, broke ranks with its larger US-based competitors and told a UK parliamentary committee that forcing companies to change their rating agency regularly would increase competition and prevent “group think”.
“Mandating rotation will provide diversity of opinion and it should increase competition . . . It should create a level playing field,” said Alan Reid, managing director for Europe at DBRS, which he said has had to fight for media and investor attention.
Representatives of the big three agencies – Moody’s, Fitch Ratings and Standard & Poor’s – were far more critical of a new proposed reform package from the European Commission that would require issuers to change credit rating agency regularly as well as a series of other reforms.
“It will become more difficult for business to access the capital markets,” Dominic Crawley, head of financial services ratings at S&P, told the Treasury select committee.
Forced rotation, he added, “is a blatant infringement on normal competition”.
The reform package, known as CRA 3 because it is the third proposed directive about credit rating agencies, is aimed at addressing several common criticisms of the agencies – that they follow the market rather than lead, that they are too beholden to the issuers who pay for ratings and that they drastically understated risks in the run-up to the financial crisis.
Paul Taylor, group managing director at Fitch, said the package, while basically acceptable, “has a handful of proposals that are very damaging”.
Mr Taylor cited rotation as well as proposals to hold rating agencies legally liable for their opinions and to have the new European Securities and Markets Authority regulate rating methodology.
Last week, UK and European Union regulators told the same parliamentary committee that they were concerned that the rotation proposal could reduce the quality of ratings available to investors if companies were forced to turn to untested firms.
“The big ones don’t like rotation and the small ones do. Surprise, surprise,” said Andrew Tyrie, Treasury committee chairman. “This blatant expression of self-interest doesn’t boost our confidence that they are acting in a disinterested way in the ratings process.”
The rotation discussion capped a hearing where the four rating agencies offered carefully worded apologies for their failings before 2008 and promised that their methods had substantially improved.
The hearing is part of a broader inquiry by the Treasury committee into credit rating agencies.
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