Most rating agencies fail to apply standards

Only one third of rating agencies have incorporated an international code intended to address concerns with the industry, which has been blamed for contributing to the credit crisis.

Seven out of 21 credit rating agencies have implemented international regulatory recommendations into their codes of conduct, according to the International Organisation of Securities Commission (IOSCO).

But 14 of the rating agencies reviewed did not address the 2008 revisions of the IOSCO Credit Rating Agency Code—which is intended as a standard of good practice for the rating agency industry.

‘A number of factors may have contributed to this including the proposed EU regulations, resource constraints and the fact that the 2008 revisions were aimed at structured finance products which does not necessarily apply to rating agencies who do not offer these ratings,’ said IOSCO.

Even so, more rating agencies reported incorporating the IOSCO benchmarks into their business than when they were first surveyed in 2007. In 2007 35 rating agencies were reviewed and none of them had published a code of conduct.

‘This is an encouraging sign that all credit rating agencies, regardless of size and methodologies, are more aware of the concerns surrounding the credit rating industry and are taking steps to address these concerns,’ said IOSCO.

According to IOSCO:

• The three largest rating agencies, Fitch, Moody’s and Standard & Poors, have substantially implemented the revisions of the credit rating code.

“In 2007 35 rating agencies were reviewed and none of them had published a code of conduct.

• The Japan Credit Rating Agency is in complete compliance with the code.

• Dominion Bond Rating Service substantially incorporated the code with a few exceptions.

• Two rating agencies, Austin Ratings and Euler Hermes Rating, intended to update their codes of conduct in the near future.

IOSCO believes that its code, as well as serving as a benchmark of good practice, serves as a template for regulation, thereby facilitating easier cooperation between international regulators.

Several jurisdictions are in the process of establishing regulation based on the code, including Australia, Canada, the European Union and Japan.

By implementing the IOSCO code in their own codes of conduct rating agencies are effectively agreeing with the international regulatory consensus.

Investors can make judgments about the quality of their ratings based on the degree to which they have decided to adhere to this consensus, said IOSCO.