1 Coffee, John C Jnr, Gatekeepers (Oxford: Oxford University Press 2002)Google Scholar at p. 283ff, chapter 8 generally.

2 Regulation (EC) No 1060/2009 of the European Parliament and of the Council on credit rating agencies (CRA Regulation).

3 Discussed in Andenas, Mads and Deipenbrock, Gudula, “Credit Rating Agencies and European Financial Market Supervision”, International and Comparative Corporate Law Journal (2011), pp. 1–20.Google Scholar

4 Regulation (EU) No 513/2011 of the European Parliament and of the Council of 11 May 2011 amending Regulation (EC) No 1060/2009 on credit rating agencies.

5 The disadvantages of which are extensively discussed in Fabian Amtenbrink and Jakob De Haan, “Regulating Credit Rating Agencies in the European Union: A Critical First Assessment of Regulation 1060/2009 on Credit Rating Agencies”, 46 Common Market Law Review (2009), p. 1915 et sqq.

6 European Parliament legislative resolution of 16 January 2013 on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EC) No 1060/2009 on credit rating agencies (COM(2011)0747 – C7-0420/2011 – 2011/0361(COD)), hereinafter “CRA Amendment Regulation 2013”.

7 Markus K. Brunnermeier, Andrew Crockett, Charles Goodhart, Avinash D. Persaud and Hyun Song Shin, “The Fundamental Principles of Financial Regulation”, Geneva Reports on the World Economy (2009); Caliari, Aldo, “Assessing Global Regulatory Impacts Of The U.S. Subprime Mortgage Meltdown:International Banking Supervision And The Regulation Of Credit Rating Agencies”, 19 Transnat’l L. & Contemp. Probs. (2009), p. 145 et sqq.Google Scholar; McVea, Harry, “Credit Rating Agencies, The Subprime Mortgage Debacle and Global Governance: The EU Strikes Back”, 59 ICLQ (2010), p. 701 et sqq.CrossRefGoogle Scholar

8 Goodhart argues that structured products have been rated more inaccurately than the usual corporate bonds as rating fees for these have been much higher, see Goodhart, Charles AE, The Regulatory Response to the Financial Crisis (Cheltenham: Edward Elgar 2009), at p. 121.Google Scholar

9 Ibid.

10 CRA Amendment Regulation 2013, Art 8.

11 Goodhart, Charles, Hartmann, Philippe and Llewellyn, David, Financial Regulation: Why, How and Where Now? (London: Routledge, 1998), Chapter 1.Google Scholar

12 Wessendorf, Erin M., “Regulating the Credit Rating Agencies”, 3 Enterpreneurial Business Law Journal (2008), p. 155 et sqq.Google Scholar; White, Lawrence J, “Credit-rating Agencies and the Financial Crisis: Less Regulation of CRAs is a Better Response”, 25 Journal of International Banking Law and Regulation (2010), p. 170 et sqq Google Scholar

13 Tett, Gillian, Fool's Gold (London: Abacus, 2010).Google Scholar

14 Kruck, Andreas, Private Ratings, Public Regulations: Credit Rating Agencies and Global Financial Governance (Basingstoke: Palgrave Macmillan, 2011) at chapters 1 and 3.CrossRefGoogle Scholar

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18 Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast).

19 Bruner, Christopher M, “States, Markets and Gatekeepers: Public-Private Economic Regimes in an Era of Economic Globalisation”, 30 Michigan Journal of International Law (2009), p. 125 et sqq.Google Scholar

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21 Many argue that the US SEC's regulation to register only established and tested credit ratings agencies created further barriers to entry for competitors, protecting the incumbents’ oligarchy, see 15 USC § 78o-7 and Manns, Jeffrey, “Rating Risk After the Subprime Mortgage Crisis: A User Fee Approach for Rating Agency Accountability”, 87 North Carolina Law Review (2009), p. 1011 et sqq.Google Scholar

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24 Darcy, Deryn, “Credit Rating Agencies and the Credit Crisis: How the ‘Issuer Pays’ Conflict Contributed and What Regulators Might Do About It”, Colum. Bus. L. Rev. (2009), p. 605 et sqq Google Scholar; Herwig, and Langohr, Patricia, The Rating Agencies and Their Credit Ratings: What They Are, How They Work and Why They are Relevant (Chicester: John Wiley & Sons, 2010) at p. 161 et sqq.Google Scholar

25 Bisset v Wilkinson [1927] AC 177.

26 CRA Regulation, Part I, Annex I, Section D.

27 Part II, Annex I, Section D.

28 Para 1, Part II, Annex I, Section E. Such information is now collated and provided for public access via ESMA's database CEREP, see <http://cerep.esma.europa.eu/cerep-web/homePage/displayAbout.xhtml> (last accessed on 23 April 2013).

29 Bai provides a detailed analysis of the situations of conflicts of interest that could arise on a personal level for analysts in the rating agency, as well as conflicts of interest that could arise for the agency itself, see Bai, Lynn, “On Regulating Conflicts of Interests in the Credit Rating Industry”, 13 NYU Journal of Legislation and Public Policy(2010), p. 253 et sqq.Google Scholar

30 CRA Regulation, Para 2, Annex I, Section B.

31 Art 11, Para 1, Annex I, Section E.

32 Commission, ‘Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 1060/2009 on credit rating agencies’ COM(2011) 747 final, adopted in CRA Amendment Regulation 2013, Annex I, Section E, Part II, para 2(a) and (aa).

33 CRA Regulation, Art 12, Part III, Annex I, Section E.

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37 Daniel M. Covitz and Paul Harrison, Testing Conflicts of Interest at Bond Rating Agencies with Market Anticipation: Evidence that Reputation Incentives Dominate (Fed. Reserve Bd., Dec. 2003), available at <http://www.federalreserve.gov/pubs/feds/2003/200368/200368pap.pdf> (last accessed on 23 April 2013).

38 Goodhart, Charles AE, The Regulatory Response to the Financial Crisis (Cheltenham: Edward Elgar, 2009), at p. 121.Google Scholar

39 As of Dec 2004, at <http://www.iosco.org/library/pubdocs/pdf/IOSCOPD180.pdf> (last accessed on 23 April 2013).

40 Bai, “On Regulating Conflicts of Interest” (2010), op cit.

41 Proposal for a Regulation of the European Parliament And Of The Council amending Regulation (EC) No 1060/2009 on credit rating agencies (Nov 2011); Proposal for a Directive of the European Parliament And Of The Council amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings of collective investment in transferable securities (UCITS) and Directive 2011/61/EU on Alternative Investment Funds Managers in respect of the excessive reliance on credit ratings (Nov 2011) to clarify that AIFMs and UCITs should not rely solely on credit ratings in their risk management strategies, now adopted in CRA Amendment Regulation, Arts 5a, 5b and 5ab.

42 16 Dec 2010, <http://www.bis.org/bcbs/basel3.htm> (last accessed on 23 April 2013).

43 Basel Committee, International Framework for Liquidity Measurement, Standards and Monitoring at <http://www.bis.org/publ/bcbs188.pdf> (last accessed on 23 April 2013); amended in Jan 2013, <http://www.bis.org/publ/bcbs238.htm> (last accessed on 23 April 2013).

44 Basel Committee, Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (Dec 2010, rev June 2011).

45 Staikouras also argues that a move to internal evaluation models could lead to more information opacity and asymmetry in the market, see Panagiotis K Staikouras, “A Theoretical and Empirical Review of the EU Regulation on Credit Rating Agencies: In Search of Truth, Not Scapegoats”, Financial Markets, Institutions and Instruments (2012), p. 71 et sqq. See “Rating Agencies: Outlook Unchanged”, Financial Times (14 Jan 2013).

46 CRA Amendment Regulation 2013, Art 35a.

47 CRA Amendment Regulation 2013, art 5a.

48 CRA Amendment Regulation 2013, art 35a(1).

49 CRA Amendment Regulation 2013, art 35a(4).

50 Haar however argues that one of the fears surrounding the investor’s civil enforcement action is that investors may see credit rating agency liability as a way out to compensate them for their primary investment loss, see Brigitte Haar, “Civil Liability of Credit Rating Agencies – Regulatory All-or-Nothing Approaches between Immunity and Over-Deterrence” (2012), available on the Internet at <http://ssrn.com/abstract=2198293> (last accessed on 23 April 2013).

51 In the Australian case of Bathurst Regional Council v. Local Government Financial Services [2012] FCA 1200, it could be argued that a few characteristics that made the case successful for the investors against the rating agency would also be established successfully under the CRA Amendment Regulation 2013, art 35a. These are the proximate relationship between the agencies and specifically identified investors giving rise to the reasonable reliance by the investors, the relatively unsophisticated position of the investors in relation to structured finance and the false and misleading nature of the rating which was based on inaccurate information known to the rating agency, which could amount to an ‘intentional’ breach or ‘gross negligence’.

52 European Commission, Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 106 0/2009 on credit rating agencies (15 November 2011) at <http://ec.europa.eu/internal_market/securities/docs/agencies/COM_2011_747_en.pdf> (last accessed on 23 April 2013).

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56 Articles 50–53, Undertakings for Collective Investment in Transferable Securities Directive, 2009/65/EC, transposed in COLL 5.2, FSA Handbook.

57 Financial Services Authority, Product Intervention: Discussion Paper (Jan 2011). This is authorised by section 137C, Financial Services Bill 2012; Article 9(3), ESMA Regulation 2010; Commission proposals for a Directive on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council (Oct 2011).

58 CRA Regulation, Recital 23, Art 23.

59 Article 7(2).

60 Para 8, Annex I, Section C.

61 Article 7(3).

62 Article 7(4).

63 Annex I, Section C.

64 Para 1, 2(a) and (b), Annex 1, Section C.

65 Para 2(c), Annex 1, Section C.

66 Para 4, Annex 1, Section C.

67 Para 4, Annex 1, Section B.

68 CRA Amendment Regulation, Art 6b.

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72 CRA Regulation, Paras 5 and 6, Annex I, Section A.

73 Art 6(3).

74 Para 9, Annex I, Section A.

75 Danielle Blanchard and Georges Dionne, “Risk Management and Corporate Governance” (HEC Montreal Risk Management Chair Working Paper, 2003), available on the Internet at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=441482> (last accessed on 23 April 2013).

76 Kim, Samuel S, “Mutual funds: Solving the Shortcomings of the Independent Director Response to Advisory Self-Dealing through Use of the Undue Influence Standard”, 98 Columbia Law Review (1998), p. 474 et sqq.CrossRefGoogle Scholar

77 CRA Amendment Regulation 2013, art 8.

78 CRA Regulation, Annex I, Section D, Part I, para 4.

79 CRA Amendment Regulation 2013, art 8a that refers to a joint obligation with the issuer to make such disclosures.

80 Herwig, and Langohr, Patricia, The Rating Agencies and Their Credit Ratings: What They Are, How They Work and Why They are Relevant (Chicester: John Wiley & Sons, 2010) at p. 367 et sqq.Google Scholar

81 CRA Regulation, Annex I, Section D, Part I, para 2.

82 Annex I, Section D, Part II, para 2.

83 Art 8(3).

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86 Commission Regulation, art 6.

87 Commission Regulation, art 4.

88 Commission Regulation, art 7.

89 Partnoy, Frank, “Rethinking Regulation of Credit-Rating Agencies: An Institutional Investor Perspective”, 25 Journal of International Banking Law and Regulation (2010), p. 188 et sqq Google Scholar; Lynch, Timothy E, “Deeply and Persistently Conflicted: Credit Rating Agencies in the Current Regulatory Environment”, 59 Case Western Reserve Law Review (2009), p. 227 et sqq Google Scholar; Wessendorf, Erin M, “Regulating the Credit Rating Agencies”, 3 Enterpreneurial Business Law Journal (2008), p. 155 et sqq.Google Scholar

90 Amadou NR Sy, ‘The Systemic Regulation of Credit Rating Agencies and Rated Markets’ (June 2009) IMF Working Paper No 09/129, available on the Internet at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1426448> (last accessed 23 April 2013).

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93 CRA Amendment Regulation 2013, art 8(5).

94 CRA Regulation, Annex I, Part I, Section D, paragraph 1(3).

95 Art 10(5).

96 Art 8(6).

97 ESMA, “Annual Report on the Application Regulation on Credit Rating Agencies as provided by Article 21(5) and Article 39a of the Regulation (EU) No 1060/2009 as amended by Regulation No 1095/2010” (12 January 2012) ESMA/2012/3, available on the Internet at <http://www.esma.europa.eu/system/files/2012-3.pdf> accessed 3 January 2013 (last accessed on 23 April 2013); Commission Regulation.

98 ESMA, “ESMA's Report on the Supervision of Credit Rating Agencies” (22 March 2012), supra note 97. For example, ESMA found less than satisfactory the records kept of internal meetings that are crucial in the lead-up to the issuing of the rating (para 17), the decision- making procedures in internal committees finalising a rating (paras 20, 23), the time pressures under which analysts may be working (para 24), and high staff turnover that may affect rating competence and consistency (para 29).

99 ESMA, Credit Rating Agencies: Annual Report 2012 (March 2013).

100 CRA Amendment Regulation 2013, arts 8b and 8c.

101 above, art 6a.

102 CRA Regulation, art 10(3).

103 Amtenbrink, Fabian and Haan, Jakob De, “Regulating Credit Rating Agencies in the European Union: A Critical First Assessment of Regulation 1060/2009 on Credit Rating Agencies”, 46 Common Market Law Review (2009), p. 1915 et sqq.Google Scholar

104 CRA Regulation, Annex I, Part I, Section D, para 1(4) requires credit rating agencies to disclose whether they consider the quality of information used by them to be satisfactory. This however does not amount to a limited or qualified rating, and investors may be unsure of how to treat such disclosures.

105 CRA Amendment Regulation 2013, art 8a.

106 Patrick Jenkins, “Rating Groups could Self–Regulate”, Financial Times(London, 26 June 2012).

107 Kruck, Andreas, Private Ratings, Public Regulations: Credit Rating Agencies and Global Financial Governance (Basingstoke: Palgrave Macmillan, 2011) at chapters 1 and 3.CrossRefGoogle Scholar

108 Black, Julia, “Enrolling Actors in Regulatory Systems: Examples from UK Financial Services Regulation”, Public Law (2003), p. 63 et sqq Google Scholar; Black, Julia, “Mapping the Contours of Contemporary Financial Services Regulation”, 2 Journal of Corporate Law Studies (2002), p. 253 et sqq.Google Scholar See also concurring account from the sociological point of view, Snider, Laureen, “The Conundrum of Financial Regulation: Origins, Controversies, and Prospects”, 7 Annual Review of Law and Social Science (2011), p. 121 et sqq.CrossRefGoogle Scholar

109 Herwig, and Langohr, Patricia, The Rating Agencies and Their Credit Ratings: What They Are, How They Work and Why They are Relevant (Chicester: John Wiley & Sons, 2010) at 111 et sqqGoogle Scholar; Alcubilla, Raquel García and del Pozo, Javier Ruiz, Credit Rating Agencies on the Watch List: Analysis of European Regulation (Oxford: Oxford University Press, 2012) at chapter 1.CrossRefGoogle Scholar

110 Gerding, Erik F, “Code, Crash and Open Source”, 84 Washington Law Review (2009), at p. 127 et sqq.Google Scholar

111 The accountability and liability of ESMA is another issue that affects the question whether ESMA ought to be in the position of governing the governance role of credit rating agencies. This paper will not belabour this for lack of space but see Niamh Moloney, “The European Securities and Markets Authority and Institutional Design for the EU Financial Market – A Tale of Two Competences: Part 2”, 12 European Business Organisation Review (2011), p. 178 et sqq.

112 Buchanan, James M. “An Economic Theory of Clubs”, 32 Economica (1965), pp. 1–14.CrossRefGoogle Scholar

113 Basic v Levinson, 485 U.S. 224 (1988).

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115 Also generally the ‘law matters’ thesis supports civil enforcement as key to strong securities markets. Rafael La Porta, Florencio Lopez–de–Silanes, Andrei Shleifer and Robert W. Vishny, “Legal Determinants of External Finance”, 52 Journal of Finance (1997), p. 1131 et sqq; Rafael La Porta, Florencio Lopez–de–Silanes, Andrei Shleifer, “What Works in Securities Laws” 71 Journal of Finance (2006), p. 1 et sqq; Bernard S Black, “The Legal and Industrial Preconditions for Strong Stock Markets” (Stanford Law School Working Paper No. 179, 2001).

116 A variety of alternative options is discussed in Alcubilla, Raquel García and del Pozo, Javier Ruiz, Credit Rating Agencies on the Watch List: Analysis of European Regulation (Oxford: Oxford University Press, 2012) at chapter 5.1, pp. 246 et sqq.CrossRefGoogle Scholar

117 Lynch, Timothy E, “Deeply and Persistently Conflicted: Credit Rating Agencies in the Current Regulatory Environment”, 59 Case Western Reserve Law Review (2009), p. 227 et sqq.Google Scholar

118 See Chiu, Iris H–Y, “Macro–prudential Supervision: Critically Examining the Developments in the UK, EU and Internationally”, Law and Financial Markets Review (2012), p. 184 et sqq.CrossRefGoogle Scholar

119 Goodhart, Charles AE, The Regulatory Response to the Financial Crisis (Cheltenham: Edward Elgar, 2009) at p. 129 et sqq.Google Scholar