In the Australian case of Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200, the Australian Federal Court held Standard & Poor's (S&P) to be jointly liable with ABN Amro Bank NV and Local Government Financial Services for losses suffered by 13 local councils, who had invested in complex credit derivatives that had been rated 'AAA' (the highest possible rating) by S&P.

S&P denied that the rating was inappropriate and contended that its ratings were merely opinion, upon which only the most imprudent of investors would solely rely. However, S&Ps defence was ultimately unsuccessful, as the judge held that S&P's rating was not only "hopelessly deficient", but "misleading and deceptive and involved the publication of information or statements false in material particulars and otherwise involved negligent misrepresentation to the class of potential investors in Australia". The judge went on to say that credit rating agencies (CRAs) should not be absolved from all responsibility in the event that an investor relies on their ratings and subsequently sustains serious financial losses.

S&P has said that it will appeal. If it changes its mind, or the appeal fails, that could make it easier for other investors who have relied on negligent rating agency assessments to recover their investment losses as well.

From a European perspective, this judgment seems to fit neatly with the Credit Rating Agencies Regulation III (Regulation III), which could be in force from January 2013. If it comes into force in its current form, Regulation III will allow investors to hold CRAs to account before their national courts for any losses that result from a rating which, intentionally or with gross negligence, infringes any of the new rules.

The judgment also raises the question of whether regulators ought to seek to address the flaw that this case exposes: namely, that of a system in which ratings relied upon by investors for an impartial assessment of risk are given by agencies who are paid to do so by the issuer of a product. Although the recent amendments to the EC Credit Rating Agencies Directive and increased scrutiny on CRAs generally following the financial crisis have gone some way to tackle this issue, these measures seek only to address the supervision of CRAs operating in the EU, leaving the question of a uniform international approach unresolved.

A copy of the full judgment of this case can be viewed here.