Credit Rating Services Act No. 24 of 2012 (CRSA) adopted early 2013 seeks to give effect to the G20 recommendation that credit rating agencies whose ratings are used for regulatory purposes should be subject to adequate levels of regulatory oversight regime that includes registration and ongoing supervision.

Credit rating agencies issue opinions on the creditworthiness of a particular issuer or financial instrument, the prospect that an issuer will honor its financial obligations on a timely basis. These opinions are referred to as “credit ratings” and carry considerable weight in financial markets, both in terms of business practice and regulatory requirements. Apart from such ratings being used by banks in determining required capital and reserve funds, there are other instances where institutions are legally required to obtain credit ratings. In terms of the Local Government: Municipal Finance Management Act, 2003 (Act No. 56 of 2003); The listing requirements of the Johannesburg Stock Exchange Limited refer to credit ratings, as well as the Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002), to name just a few examples.

What is the procedure to register a Credit Rating Agency in South Africa? We will consider the (I) application for registration, (II) suspension/termination of registration, (III) liability, and (IV) draw a conclusion.

I. Application for registration

An application for registration as a credit rating must be made in the form and manner prescribed by the registrar of credit rating agencies (as contemplated in section 21) and must be lodged with the registrar.

Section 21 states that the executive officer and deputy executive officer contemplated in section 1 of the Financial Services Board Act are the registrar and deputy registrar of credit rating agencies, respectively, and have the powers and functions provided for under this Act or any other applicable law.

The Act requires agencies to disclose a number of details, including but not limited to:- proof of Companies registration under the Companies Act; details of structure; policies and procedures as well as details of the agents 20 largest clients and the percentage which they contribute to the total annual revenue of the credit rating agency; The applicants corporate governance policies; The agent must further satisfy the registrar that the applicant, its directors and employees comply with the fit and proper prescribed requirements. Systematic methodologies must be described and these are subject to review on a regular basis; confirmation of adequacy of financial resources, management and human resources. The applicant must supply any other information, which the registrar may reasonably require and may require that any information that accompanied the application to be verified. Certain applicant’s may be exempt by the Registrar should a certain criteria be met.

II. Suspension and cancellation of registration

The registrar may, after consultation with any local regulatory authority that relies on, refers to or uses credit ratings in its supervision and regulatory activities, at any time, suspend or cancel the registration of a credit rating agency if the registrar is satisfied, on the basis of available facts, that the credit rating agency:

  1. expressly renounces the registration or has provided no credit rating services for the preceding six months;
  2. obtained the registration by providing false information or by any other irregular means;
  3. no longer meets the conditions under which it was registered;
  4. failed to comply with any condition imposed under this Act or any directive issued under this Act;
  5. has been liquidated.

III. Liability of credit rating agencies

Section 19 (1) of the Act states that “a credit rating agency may be delictually liable to an investor or a member of the public, in respect of a credit rating issued or credit rating services performed in the ordinary course of business in terms of this Act, for any loss, damages or costs sustained as a result of such credit rating or credit rating service.” This Subsection does not affect any additional or other liability of a credit rating agency to an investor or member of the public, arising from a contractual relationship or the application of any law. A credit rating agency may not, through a contract, agreement or in any other way, limit or reduce the liability that such credit rating agency may incur in terms of this section or in terms of the common law. In addition the registrar may, refer any contravention of this Act to the enforcement committee established in terms of section 10(3) of the Financial Services Board Act. Alternatively apply to a court for an order restraining such person from continuing to commit any such act or omission; or any such future act alternatively an order requiring the person to take such remedial steps as the court deems necessary to rectify the consequences of the act or omission. Any person who contravenes or fails to comply with any provision of this Act by deliberately makes a misleading, false or deceptive statement, or conceals any material fact; or in the execution of duties imposed by this Act, gives an auditor or compliance officer information which is false, misleading or conceals any material fact, is guilty of an offence and on conviction liable to a fine or to imprisonment for a period not exceeding 10 years or to both a fine and such imprisonment.

IV. Conclusion

CRSA has increased accountability and transparency, creating key statutory duties including the implementation of administrative, accounting and risk management procedures for agencies and contemplates heavy penalties for contravention.  An ethical code of conduct is required along with registration with the Financial Services Board (the “FSB”) and compliance with certain reporting requirements.