In the last edition of the Banking and finance disputes review, we described the new civil liability regime for credit rating agencies (CRAs) in the EU. This was introduced by Regulation (EC) No 462/2013, implemented in the UK by the Credit Rating Agencies (Civil Liability) Regulations 2013 (the ‘Regulations’). The Regulations allowed market participants to claim compensation from CRAs even where there was no contractual relationship or other relationship giving rise to a duty of care, although it was limited to intentional or grossly negligent actions by the CRA.

Before this new regime was agreed, in 2012, a first instance decision in Australia imposed on CRAs liability to investors under Australian investor protection legislation. This decision has now been upheld on appeal and, in this article, we analyse the appeal decision and its implications for CRAs, financial institutions and investors in the EU and governed by the Regulations.

ABN Amro v Bathurst

The Full Federal Court of Australia, delivering its judgment in the matter of ABN Amro & Ors v Bathurst Regional Council & Ors, dismissed all appeals (save for one cross-appeal in respect of the apportionment of claims) and upheld the judgment of Jagot J (delivered on November 5, 2012).

The court’s judgment confirms the findings of Jagot J that a CRA may be liable to investors for its rating of a financial product, a financial institution may be liable to investors in structuring and marketing a financial product to be sold to those investors, and the reseller of a financial product may also be liable to the investors to whom it on-sells such products.

The decision confirms that entities involved with selling, arranging or rating complex financial products may be liable to investors in circumstances where there has been misleading or deceptive conduct or where negligent misrepresentations are made to investors, even if there is no direct relationship between the entity and the investor.

Judgment at first instance

In 2009, 13 local councils in New South Wales commenced proceedings in the Federal Court of Australia against Local Government Financial Services Pty Limited (LGFS) for losses incurred after the councils purchased a complex structured synthetic investment product (a constant proportion debt obligation known as ‘Rembrandt’) from LGFS, which in turn had purchased Rembrandt from ABN Amro. Prior to LGFS’s purchase of Rembrandt from ABN Amro, the product had been assigned a ‘AAA’ rating by Standard and Poor’s (S&P), which LGFS alleged was essential to its purchase (and subsequent marketing) of Rembrandt. LGFS and the councils consequently brought claims against S&P and ABN Amro.

The judgment of Jagot J resulted in orders for damages to be paid to the councils by LGFS, S&P and ABN Amro in the amount of approximately A$15.8M and by S&P and ABN Amro to LGFS in the amount of approximately A$16M. The insurer of LGFS, American Home Assurance Company (AHAC), was ordered to indemnify LGFS in full in respect of its liability to the councils.

LGFS, S&P ABN Amro and AHAC each appealed the judgment.

CRA liability

The finding by Jagot J that the AAA rating assigned by S&P to the notes issued by Rembrandt (the ‘Notes’) was misleading and deceptive in contravention of ss1041H and 1041E of the Corporations Act 2001 and s12DA of the Australian Securities and Investments Commission Act 2001 was upheld by the court. This was because the rating conveyed a representation that, in S&P’s opinion, the capacity of the Notes to meet all financial obligations was ‘extremely strong’, as well as a representation that S&P had reached this opinion based on reasonable grounds and as the result of an exercise of reasonable care and skill, when neither representation was true and S&P knew that the representations were not true when they were made.

Liability of financial institution

The court also upheld the findings that ABN Amro was ‘knowingly concerned’ in S&P’s misleading and deceptive conduct and that ABN Amro itself engaged in misleading and deceptive conduct towards LGFS and the potential investors, with whom it knew LGFS intended to deal, by reason of its use of the AAA rating and the representations it made itself as to the meaning and reliability of the AAA rating, which it knew to be untrue.

In addition, the court upheld the finding that ABN Amro breached its contract with LGFS under which it was to model and structure the transaction by which LGFS would purchase Notes with a degree of security commensurate with an S&P rating of AAA.

Liability of reseller

The finding that LGFS engaged in misleading and deceptive conduct towards the councils by reselling the Notes was upheld, as were the findings that the Notes were each a derivative under the Corporations Act (as they were not a debenture) and that LGFS had thus acted in breach of its Australian Financial Services Licence in dealing with the Notes.

The court further upheld Jagot J’s finding that LGFS owed a fiduciary duty to each of the councils and that, in its dealings with them, LGFS breached its fiduciary duty to avoid a conflict of interest in relation to the Notes, or to disclose and obtain informed consent to such conflicts.

Characterisation of the notes

In finding that the Notes were not a debenture (and therefore fell within the definition of ‘derivative’ in s761D(1) of the Corporations Act), the court commented that an instrument which provides for the return of the amount deposited at a particular time and in a particular amount not linked to the conduct of the business of the company which issued it, but instead linked to and measured by the performance of a separate index, does not constitute a debt falling within the meaning of ‘debenture’ under the Corporations Act. Further, it is fundamental to the nature of a debenture that it be issued by the company which borrowed the funds and this condition was not satisfied in respect of the Notes.

Damages, contributory negligence and apportionment

The court rejected the submissions of the appellants that the councils and LGFS had been contributorily negligent in purchasing the Notes and that their damages should be reduced to reflect this contributory negligence.

The court overruled the finding of Jagot J that the councils’ entitlements to damages against ABN Amro, LGFS and S&P (pursuant to s1041E of the Corporations Act) were apportionable claims, holding instead that damages suffered as a result of a contravention of s1041E are not apportionable and that ABN Amro, LGFS and S&P are consequently jointly and severally liable for the councils’ losses.


The court’s judgment confirms the liability of each of S&P, ABN Amro and LGFS to the councils (and the liability of S&P and ABN AMRO to LGFS) for misleading and deceptive conduct in their respective roles in relation to the investment in this complex structured financial product and for the resulting losses suffered by the investors.

The Australian statutory liability is analogous to the European liability regime. In both cases, although the class of possible claimants is wide, only certain behaviour will found liability: in Australia, ‘misleading or deceptive conduct’; in the EU, actions committed ‘intentionally or with gross negligence’.

Interestingly, the court found that the AAA rating constituted an implied representation that the CRA had reasonable grounds for its opinion and that it had exercised reasonable care and skill in forming it. The court also considered that there would be a tortious duty of care owed by the CRA to investors and that the disclaimers in the pre-sale report and other materials available to investors were not sufficient to negate this. These findings could be relevant to similar claims in other common law jurisdictions.

The increased regulatory scrutiny of financial markets following the global financial crisis has extended to CRAs in Europe, the US and elsewhere. In the EU, it has led to increased regulation of CRAs and the imposition of civil liability on them. This lengthy and complex Australian judgment shows that courts may be prepared to find CRAs liable to wide classes of investors.