ASIC makes ratings agencies liable

ASIC announced the formalisation of its previously flagged changes to the regulation of credit rating agencies in Australia, last week. The changes are mostly linked to the requirement that CRAs will need to hold an Australian Financial Services licence from January 2010.

The obligations that this will impose on the CRAs appear to be benign, in that the obligations reflect what is largely standard operating procedure and are consistent with the global requirements of the International Organization of Securities Commissions' code of conduct for CRAs.

However, ASIC also removed the Class Order relief that allowed the citing of credit ratings by issuers of investment products without the CRA's consent. This change will also be effective from 1 January 2010.

While ASIC positioned the change as strengthening the CRAs' control over the use of their ratings, ASIC has also made it clear that the CRAs will be accountable for the ratings. By giving consent to the use of their credit ratings in prospectuses and product disclosure documents the CRAs will be liable for the content of their statements.

This could be fertile ground for class actions by aggrieved investors in the future. To date, the CRAs have successfully avoided liability on the basis that credit ratings are an opinion and nothing more but no doubt, a considerable investment will now need to be made in resources to vet prospectuses and other disclosure documents. Removing references to credit ratings from these documents would not seem to be an option.