Mauro Bussani*



After the financial crisis, rating agencies have come under repeated criticism for a variety o reasons, including their poor responsiveness and delays in modifying ratings in view of market developments. The picture that has broken surface is one in which the rating agencies ended up compromising the quality of their activities in order to facilitate the selling of services, and snatch or defend market shares in a roaring environment – while conflicts of interest in the agencies’ relationships with their clients certainly aggravated the situation.


In the US, a regulatory framework for credit rating agencies’ activity has existed since 1975, reinforced by the Credit Rating Agency Reform Act of 2006. The latter Act aimed to foster increased transparency, accountability, and competition in the credit rating agency industry for the benefit of investors. It enhanced SEC’s regulatory authority over rating agencies in several areas, requiring the SEC: to establish a registration process for credit rating agencies; to impose disclosure and filing requirements on credit rating agencies seeking registration; to prohibit certain activities of registered credit rating agencies, to censure, deny, suspend or revoke the NRSRO registration. Although this regulatory framework has not prevented the agencies from ill-performing their role, in 2008 the European Commission followed the U.S. model through a proposal for a European regulation on credit rating agencies.

The point is that both the U.S. and European regulatory approaches content themselves with focusing on the lack of competition in the rating market, on the absence of transparency in rating processes, and on the conflicts of interest inherent in the rating process. Their implied assumption is that market discipline, in the form of fear of loss of reputation, does (or at least should) provide the right incentives for high-quality ratings. According to this school of thought – to which, to nobody’s surprise, credit rating agencies fully adhere –, investors and issuers can only accept reliable and serious agencies’ conduct in the long run. Once again the creed is that the market can always regulate itself.

Before and beyond the current contrary evidence, a vast empirical literature has long highlighted that incumbent players often tend to capture the regulator to their own advantage and to the detriment of potential new entrants, and there is no reason to believe that rating agencies would be different. Moreover, the mere existence of many competitors does not guarantee quality unless there is something causing high-quality producers to benefit and low-quality producers to suffer. Despite this obvious point, so far regulatory authorities have focused on measures to improve rating agencies’ incentives and to adjust investors’ degree of reliance on agency ratings, and showed no interest in considering appropriate disincentives or constraints to rating agencies’ misbehaviour, and in devising or enhancing remedies providing direct relief for low-quality ratings.

This approach is striking. Rating agencies are everywhere almost immune from any form of liability. In Europe there is no case law on point. In U.S., courts have failed to recognize the de facto regulatory power of rating agencies within the market, equating their ratings to mere opinions, thereby imposing liability on the agencies only when they were found causing the harm intentionally (the latest challenge brought to this legal trend is the lawsuit filed late last week by California Public Employees Retirement System, or Calpers, against Moody's, Standard & Poor's and Fitch, at the California Superior Court in San Francisco).


Be they keeping their private for-profit nature, or shifting to an international institutions’ owned not-for-profit structure, there is the need of a global strategy for imposing liability on credit rating agencies to ensure appropriate (public and private) accountability. In particular, agencies should bear a significant liability for their misbehavior, where ‘significant’ means that liability should be dependant on the negligent breach of  a pre-determined (and revisable in the course of time) set of duties. Beyond stay or stop of the activity, agencies should be liable to compensation, disgorgement, and penalties, whose amount should be linked to a fixed multiple, and imposed not to benefit plaintiffs but to feed an international fund to be set up with the aim to compensate victims of financial entities that become insolvent and leave investors holding an empty bag. Third party insurance coverage should be mandatory imposed upon the agencies, also to set a market-users friendly threshold for the agencies’ choice to leave, or to keep playing into, the market.

Finally, for the activities carried on by the rating agencies, which have a sweeping and truly global impact on the whole of the economies of States and inhabitants of the planet, what is needed is the establishment of a global jurisdiction, with de-centralized ad hoc courts applying the same substantive and procedural law.








* Full Professor of Comparative Law, University of Trieste, Italy

Scientific Director, International Association of Legal Sciences (UNESCO)