New rules are being introduced on a Europe-wide level in relation to credit rating agencies and the use of credit ratings by financial institutions and investors. This can be traced back to the concern in some quarters about the role of the credit rating agencies in the financial crisis of 2007/2008, including a perceived lack of independence on the part of the rating agencies and the over-reliance by some investors on ratings.
In the UK, the Credit Rating Agencies (Civil Liability) Regulations 2013 were published last week and will come into force on 25 July 2013. The Regulations set out how certain terms used in Article 35a of the European Regulation on Credit Rating Agencies are to be interpreted and applied. Article 35a of the European Regulation is intended to harmonise the civil regulation of rating agencies across Europe and provides for civil liability of rating agencies when an agency, either intentionally or with gross negligence, commits any of the infringements specified in the European Regulation.
Points addressed within the UK Regulations include:
- An infringement shall be considered to have been committed with gross negligence if the senior management of the credit rating agency were reckless as to whether the infringement occurred.
- A limitation on liability is permitted where it is reasonable and proportionate in all the relevant circumstances. Relevant factors are set out in regulations 10, 11 and 12 and vary depending on whether the claimant is an investor or an issuer (and if an issuer, whether the credit rating was unsolicited).
- The damages recoverable by a claimant depend on whether they are an issuer or an investor. For both investors and issuers who have entered into a contract with a rating agency, the level of damages recoverable under article 35a will be the damages recoverable in accordance with that contract. Where there is no contract then the damages recoverable by an issuer will be the increased cost of financing resulting from the relevant credit rating; in contrast, the measure of damages for a claim by an investor where there is no contract will be the damages that would be recoverable if the investor succeeded in a claim for negligence (i.e. a claim in tort) against the rating agency. Additionally, damages may be reduced if a claimant fails to mitigate its loss.
- A one year limitation period for bringing a claim will apply, starting with the date on which the claimant discovers the infringement or could, with reasonable diligence, have discovered it.
While they are part of a bigger regulatory picture, these regulations will obviously be of interest to anyone who feels they have suffered a loss as a result of a misleading credit rating and could lead to an uptick in claims against rating agencies, although it is to be noted that the threshold of “gross negligence” being equated with the reckless performance of their roles by senior management is an extremely high threshold. The regulations will also be of interest to any insurers providing cover to rating agencies and also to FI insurers more widely as the rating agencies may increasingly become an alternative target for claims by investors who might otherwise have focused on the role of the banks and other financial institutions who have been the subject of much of the financial litigation of the last few years.