Credit rating agencies are trying to shrug off the importance placed on their ratings, saying they are merely opinions on the creditworthiness of a product or institution and should not be seen as a buy or sell recommendation.
This argument is being used to oppose clauses proposed in the draft Credit Rating Services Bill currently before parliament.
Various institutions use credit ratings to convince investors to buy their products, among them unit trust managers. In one of its brochures, Allan Gray said it had a partnership with the Bermuda-based Orbis Group, which was rated "investment grade" by Standard & Poor's (S&P). Most of Stanlib's monthly fund fact sheets include ratings from Morningstar.
According to the memorandum accompanying the draft bill, some institutions are legally required to obtain credit ratings, such as municipalities which are barred by laws regulating municipal finances from investing in anything not rated as investment grade.
The aim of the bill is to make rating agencies responsible and accountable; protect the integrity, transparency and reliability of the credit rating process; improve investor protection; improve the fairness, efficiency and transparency of financial markets, and reduce systemic risk.
After the outbreak of the global financial crisis in 2008, the Group of 20 decided, among other things, to subject rating agencies to stringent regulatory oversight.
The agencies were apportioned some blame for the crisis as they failed to adapt their ratings in line with worsening market conditions and had given high ratings to securities used to disguise toxic assets.
The draft bill was a response to the ratings industry never having been regulated in SA.
But agencies operating in SA have raised objections. A spokesman at Moody's said: "Moody's supports South Africa's commitment to introducing a regulatory framework for credit rating agencies; however, we remain concerned about the construction of certain aspects of the bill, such as endorsement and liability and the potential extra-territorial reach of the bill."
The liability clause is also troubling local agency Global Credit Rating Co (GCR).
In a letter to Thabadiawa Mufamadi, chairman of parliament's standing committee on finance, GCR managing director Melanie Brown said the draft bill would make it more difficult to employ or retain analysts because of the clause which would hold agencies liable for any loss or damages resulting from their credit rating or service.
Any breach of the legislation would lead to hefty fines or imprisonment of up to 10 years.
"The draft bill recognises a 'credit rating' to be an 'opinion' about the (future) creditworthiness of an entity or a financial instrument, and as such a credit rating is subject to a number of variables and factors which can be unknown and complex in nature," wrote Brown. "[These] cannot be qualified as incorrect."
S&P is worried the draft bill will ''copy and paste" existing European legislation.
Konrad Reuss, S&P's MD for SA and sub-Saharan Africa, said local regulators need to take cognisance of the fact that the size of the rating industry and capital market in Europe is much larger than it is in South Africa.
He said regulations for rating agencies should be proportionate to the market.
