Regulation: Success or Failure?

Hemraj, Mohammed

doi:10.1007/978-3-319-17927-8_7

Regulation: Success or Failure?

Mohammed Hemraj²

Chapter

1021 Accesses

Abstract

This book has taken a holistic view by examining various regulations ranging from self-regulation, statutory regulation and common law regulation in the US and EU. The intention of regulation is to solve the problems of conflicts of interest, lack of competition and lack of accountability on the part of credit rating agencies (CRAs). The regulation consists of soft laws, statutory regulations and common law. The book’s premise is that for any regulation to play an effective role, it needs to have a deterrent effect in the form of imposing gatekeeper accountability on CRAs, thus compelling them to issue reliable ratings. Although this was critically examined in the preceding chapters, this last chapter aims to highlight the key issues, which hinge on whether or not regulation introduced in the US and EU is a success or a failure, and to consider the conclusions reached and make recommendations.

This is a preview of subscription content, log in via an institution.

Chapter: USD 29.95; Price excludes VAT (USA)

eBook: USD 39.99; Price excludes VAT (USA)

Softcover Book: USD 54.99; Price excludes VAT (USA)

Hardcover Book: USD 54.99; Price excludes VAT (USA)

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Notes

1.
Financial Oversight of Enron (2002), p. 98.
2.
Ibid.
3.
Lamb (2013). See also Glossary for definition of “structural products”.
4.
CDO consisted of private equity debt, auto debt, credit card debt, etc. See Glossary for definition of CDO.
5.
See Buckley (2011), p. 69. See also Chapter 8 “Why Everyone Loved Moody’s” in McLean and Nocera (2010).
6.
Ryan (2012a).
7.
Ryan (2012b), p. 19.
8.
Haynes (2013).
9.
Ryan (2012b), p. 19.
10.
Cadbury (2000).
11.
Donoghue (or McAlister) v Stevenson, [1932] All ER Rep 1; [1932] AC 562 (House of Lords).
12.
See Chap. 6.
13.
[1978] AC 728, [1977] 2 All ER 492, [1977] 2 WLR 1024.
14.
Part 11 of the UK Companies Act 2006.
15.
Cf Pavlides v Jensen [1956] 1 Ch 565.
16.
Section 232 (1) of the UK Companies Act 2006; See also Morse et al. (2007), p. 214.
17.
Section 232 (2) of the UK Companies Act 2006.
18.
Section 177 of the UK Companies Act 2006.
19.
Section 234 Ibid. See also Morse (2007), p. 215.
20.
Davies (2010), p. 123.
21.
Tombs and Whyte (2015).
22.
See Clayton et al. (2002). See also, Dembinski et al. (2006).
23.
Dodd-Frank Act § 931. Martin and Franker (2011), p. 6. See also Coskun (2008), p. 264.
24.
“EU plans to shake up rating agencies”, Reuters (15 November). http://us.mobile.reuters.com/article/topNews/idUSTRE7AE1KA20111115?irpc=945.
25.
“Fitch Comments on U.S. Financial Reform Act’s Implication for Credit Rating Agencies”, Reuters (19 July 2010). http://www.reuters.com/article/2010/07/19/idUS132937+19-Jul-2010+BW20100719.
26.
Dodd-Frank Act, § 459–463.
27.
Martin and Franker (2011), pp. 3 and 4.
28.
Ryan (2012a, b).
29.
See Chapter 23 “Conflict of Interest: Credit Rating Agencies”, in Davies (2010), pp. 123–130.
30.
For definition of “solicited ratings”, see Glossary.
31.
Deb and Murphy (2009), p. 5.
32.
Ryan (2012a, b).
33.
Benabou and Laroque (1992), pp. 921–958.
34.
Froeba (2009).
35.
Froeba (2009).
36.
Klintz (2011).
37.
Ibid.
38.
See Hume (2013).
39.
Gannon (2011–2012), pp. 1015–1017.
40.
Zhou and Kumar (2012), p. 1.
41.
Haynes (2014).
42.
Richardson and White (2009), pp. 101–116.
43.
See Glossary for definition of “unsolicited ratings”.
44.
For general discussion see Held and McGrew (2000).
45.
Campos (2004).
46.
Darbellay and Partnoy (2012), p. 16.
47.
Hunt (2009), pp. 109–209.
48.
Statutory Instruments, 2013 No. 1637 Financial Services and Markets, “The Credit Rating Agencies (Civil Liability) Regulations 2013”, which came into force on 25th July 2013.
49.
Duffhues and Weterings (2011).
50.
See Duffhues and Weterings (2011). de Savornin Lohman and van’t Westeinde (2006).
51.
Haar (2013).
52.
Points 1 to 3 and 5 are based on Bathurst; see Harding-Farrenberg and Donovan (2013), p. 190.
53.
Such a provision already exists in the EU aiming at eliminating conflicts of interest.
54.
The Credit Rating Agencies (Civil Liability) Regulations 2013.
55.
Ibid.
56.
Ibid.
57.
Cooper et al. (2013), p. 1.
58.
Rousseau (2009), pp. 36–37.
59.
Bussani notes, “CRAs still are almost immune from any form of civil liability, and the regulatory approaches [in the US and EU] still use… the same administrative tools that have so far proved to be largely ineffective”, Jones (2010), pp. 201–231. See Bussani (2010).
60.
Refer to the Model of a Formulation of a New Statutory Liability. Kerwer (2004), pp. 1–27.

References

Benabou, R., & Laroque, G. (1992). Using privileged information to manipulate markets: Insiders, gurus, and credibility. Quarterly Journal of Economics, 107(3), 921–958.
Article Google Scholar
Buckley, A. (2011). Financial crisis: Causes, context and consequences (p. 69). Sussex: Pearson Education Limited.
Google Scholar
Bussani, M. (2010, January). Credit rating agencies’ accountability: Short notes on a global issue. Global Jurist, 10(1).
Google Scholar
Cadbury, A. (Sir). (2000, May). The combined code principles of good governance and code of best practice. http://www.ecgi.org/codes/documents/combined_code.pdf.
Campos, R. C. (2004, September 17). Speech by SEC commissioner: The global marketplace and a regulatory overview, Para 4. http://www.sec.gov/news/speech/spch091704rcc.htm.
Clayton, R. J., Scroggins, W., & Westley, C. (2002, Spring). Enron: Market exploitation and correction. Financial Decisions. Article 1. http://www.financialdecisionsonline.org/current/clayton.pdf.
Cooper, J., Millington Jones, Z., Imhoff, J., Kirk, N., Eagles, R., Edmond, J., et al. (2013, March). Tide is turning against credit rating agencies (p. 1). Clyde & Co, FI & D&O. http://www.clydeco.com/uploads/Files/Publications/2013/CC002768_FI_and_DO_Review_20_03_13.pdf.
Coskun, D. (2008). Credit rating agencies in a post-Enron world: Congress re-visits NRSRO concept. Journal of Banking Regulation, 9(4), 264. http://www.kvdl.nl/wp-content/uploads/2013/01/Deniz-Coskun-credit-rating-agencies-in-a-post-Enron-world.pdf.
Darbellay, A., & Partnoy, F. (2012, April). Credit rating agencies and regulatory reform (University of San Diego Legal Studies Research Paper Series, Research Paper No. 12-083, p. 16). http://ssrn.com/abstract=2042111.
Davies, H. (2010). The financial crisis: Who is to blame? (pp. 123–130). Cambridge: Polity Press.
Google Scholar
de Savornin Lohman, H. A., & van’t Westeinde, M. G. (2006). Control and liability of credit rating agencies under Netherlands law. EJCL, Netherlands Comparative Law Association, 1–22. http://www.ejcl.org/111/art111-18.pdf.
Deb, P., & Murphy, G. (2009, November). Credit rating agencies: An alternative model (p. 5). http://personal.lse.ac.uk/debp/Papers/Ratings_Regulation.pdf.
Dembinski, P. H., Lager, C., Cornford, A., & Bonvin, J. M. (Eds.). (2006). Enron and world finance: A case study in ethics. Basingstoke: Palgrave Macmillan. http://www.strongwindpress.com/pdfs/TuiJian/Enron%20and%20World%20Finance%20-%20A%20Case%20Study%20in%20Ethics.pdf.
Duffhues, P. J. W., & Weterings, W. C. T. (2011, May 26). The quality of credit ratings and liability: The Dutch view. International Journal of Disclosure and Governance (advance online publication).
Google Scholar
Financial Oversight of Enron: The SEC and Private Sector Watchdogs. (2002, October 7). Report prepared by the staff of the committee on governmental affairs (p. 98). United States Senate. http://www.gpo.gov/fdsys/pkg/CPRT-107SPRT82147/pdf/CPRT-107SPRT82147.pdf.
Froeba, M. (2009, September 29). Rating agency legal liability standards. http://expectedloss.blogspot.com/2009/09/rating-agency-legal-liability-standards.html.
Gannon, J. T. (2011–2012). Help the credit rating agencies get it right: A simple way to alleviate a flawed industry model. Annual Review of Banking & Financial Law, 31, 1015–1017.
Google Scholar
Haar, B. (2013, January 9). Civil liability of credit rating agencies after CRA 3 – Regulatory all-or-nothing approaches between immunity and over-deterrence (Research Paper No. 2013-02). University of Oslo Faculty of Law. Available at SSRN: http://ssrn.com/abstract=2198293 or http://dx.doi.org/ 10.2139/ssrn.2198293.
Harding-Farrenberg, R., & Donovan, K. (2013). Figure 1, p. 190.
Google Scholar
Haynes, A. (2013). The burden of proof in the market abuse cases. Journal of Financial Crime, 20(4), 365–397.
Google Scholar
Haynes, A. (2014, March 26). Discussion.
Google Scholar
Held, D., & McGrew, A. (Eds.). (2000). The global transformations reader (2nd ed.). Cambridge: Polity Press.
Google Scholar
Hume, T. (2013, June 25). Hong Kong-based credit rating agency launched to challenge ‘Big Three’. CNN. http://edition.cnn.com/2013/06/25/business/universal-credit-rating-group.
Hunt, J. P. (2009). Credit rating agencies and the “Worldwide Credit Crisis”: The limits of reputation, the insufficiency of reform, and a proposal for improvement. Columbia Business Law Review, 109–209.
Google Scholar
Jones, R. (2010). The need for a negligence standard of care for Credit Rating Agencies. William & Mary Business Law Review, 1(1), 201–231. http://scholarship.law.wm.edu/wmblr/vol1/iss1/8.
Kerwer, D. (2004, December). Holding global regulators accountable: The case of Credit Rating Agencies. In School of Public Policy Working Paper Series Working Paper 11, University College, London, pp. 1–27. https://www.ucl.ac.uk/spp/research/publications/downloads/spp-wp-11.pdf.
Klintz, W. (2011). European Parliament Special Committee on the Financial, Economic and Social Crisis. http://www.europarl.europa.eu/document/activities/cont/201109/20110901ATT25750/20110901ATT25750EN.pdf.
Lamb, K. (2013, October 4). An introduction to structured products. http://www.investopedia.com/articles/optioninvestor/07/structured_products.asp
Martin, D. B. H., & Franker, M. C. (2011, December). Rating agency regulation after the Dodd-Frank Act: A mid-course review. Insights, 25(12), 6.
Google Scholar
McLean, B., & Nocera, J. (2010). All the devils are here: The hidden history of financial crisis. London: Penguin Ltd.
Google Scholar
Morse, G. (2007). Palmer’s Company law: Annotated guide to the Companies Act 2006 (p. 215). London: Thomson/Sweet & Maxwell.
Google Scholar
Morse, G., Davies, P., Worthington, S., Morris, R., Bennett, D. A., Hudson, A., et al. (2007). Palmer’s company law annotated guide to the Companies Act 2006 (p. 214). London: Thomson/Sweet & Maxwell.
Google Scholar
Richardson, M., & White, L. J. (2009, April 2). The rating agencies: Is regulation the answer? (Chapter 3). In V. Acharya & M. Richardson (Eds.), Restoring financial stability: How to repair a failed system (pp. 101–116). John Wiley & Sons.
Google Scholar
Rousseau, S. (2009, July 23). Regulating credit rating agencies after the financial crisis: The long and winding road toward accountability (pp. 36–37). Capital Markets Institute Research Paper. Available at SSRN: http://ssrn.com/abstract=1456708 or http://dx.doi.org/10.2139/ssrn.1456708.
Ryan, J. (2012a, January 12). How credible are the credit rating agencies? http://www.publicserviceeurope.com/article/1341/how-credible-are-the-credit-rating-agencies.
Ryan, J. (2012b, January 1). The negative impact of the credit rating agencies and the proposals for better regulations (p. 19). Working paper. http://www.swp-berlin.org/fileadmin/contents/products/arbeitspapiere/The_Negative_Impact_of_Credit_Rating_Agencies_KS.pdf.
Tombs, S., & Whyte, D. (n.d.). Corporate crime stalks the globe. Nerve. http://www.catalystmedia.org.uk/issues/nerve2/corcrime.htm.
Zhou, B., & Kumar, P. (2012, April). Economic considerations in litigation against the credit rating agencies (p. 1). The Brattle Group, Inc. Discussion Paper.
Google Scholar

Download references

Author information

Authors and Affiliations

Birmingham, UK
Mohammed Hemraj

Authors

Mohammed Hemraj
View author publications
You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

Copyright information

About this chapter

Cite this chapter

Hemraj, M. (2015). Regulation: Success or Failure?. In: Credit Rating Agencies. Springer, Cham. https://doi.org/10.1007/978-3-319-17927-8_7

Download citation

DOI: https://doi.org/10.1007/978-3-319-17927-8_7
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-17926-1
Online ISBN: 978-3-319-17927-8
eBook Packages: Humanities, Social Sciences and LawLaw and Criminology (R0)

Publish with us

Policies and ethics