New European legislation was passed last year to amend the Regulation on credit rating agencies first introduced in the aftermath of the financial crisis. Amongst its most controversial provisions, the legislation gives investors (and issuers) a new cause of action against credit rating agencies where they suffer losses as a result of breaches of the Regulation caused intentionally or by the agency’s gross negligence. Some of these breaches go to the root of the role played by rating agencies, focussing on their compliance with, and the rigour and currency of, their methodologies.

In the context of the funds’ industry, the cause of action is primarily of interest to investment funds and their managers in their capacity as institutional investors and the reliance placed by such managers upon external ratings when assessing the creditworthiness of a prospective investment (along with other eligibility criteria).

Set against a background in which the claims against credit rating agencies so far explored in key common law financial centres have had varying levels of success, the EU’s response raises a number of interesting questions about whether imposing liability in this way is a sensible response to the perceived role of the main credit rating agencies in the financial crisis.

In an article first published by Hart Publishing as Edwards, “CRA 3 and the liability of rating agencies: inconsistent messages from the regulation on credit rating agencies in Europe” (2013) 7 LFMR 186, reproduced by agreement with the publishers, senior associate Harry Edwards looks at the detail of the new cause of action and considers the tensions it creates with the wider objectives of the legislation.

Click here to read the article.

Click here to read Harry’s previous article on two Australian court judgments regarding the liability of rating agencies and banks arising out of credit ratings given to structured credit products, and whether similar claims might be successful in the English courts (first published by Hart Publishing as Edwards, “Liability for the rating and sale of structured credit products: Australian cases and their (much) wider implications” (2013) 7 LFMR 88).