Rating agencies were conflicted because they offered consulting and advisory services to some of the institutions that they rate.
So said Finance Minister Pravin Gordhan yesterday in response to a written parliamentary question on what factors determined conflict of interest within the world credit-rating agencies.
“In its September 2003 ‘Report of Analyst Conflict of Interests’, the International Organisation of Securities Commissions (Iosco) highlighted the potential conflict of interests facing the industry that can interfere with the independence and objectivity of the rating agencies’ analysis. According to Iosco, conflict of interests may arise when a rating agency offers consulting or other advisory services to issuers it rates since issuers could be unduly pressured to purchase advisory services in return for an improved rating,” he said.
The report also drew attention to the issue of “notching” by rating agencies which was “lowering ratings for issues which they had not rated”.
South Africa, which solicits ratings from four rating agencies – Standard and Poor’s, Fitch Ratings, Moody’s Investors Service and Ratings and Investment Information – received its first credit-rating downgrade since 1994 last year before the most recent downgrades.
Gordhan said there was also the practice of “solicited” versus “unsolicited” ratings, “where aggressive tactics might be used to induce payments for a rating an issuer did not request”.
He said the Credit Ratings Services Act and Rules 2013 governed the establishment of credit rating agencies in South Africa.
These agencies must be registered with the Financial Services Board (FSB), which is governed by a similar regulatory framework to Europe and the US.
“Yes, South Africa does participate in the criteria of the establishment of credit-rating agencies.
“The FSB is a member of Iosco and thus follows Iosco norms and standards when participating in the process of determining the criteria for the establishment of such agencies,” said Gordhan.
Yesterday’s response comes just two months after Gordhan took a swipe at the rating agencies, saying that the concerns they had raised about South Africa were “not about the numbers but about sentiment”. - Cape Times