8.6.2011
By Simon Miller
Investors should be forced to accept responsibility for their own investments rather than being forced to follow AAA ratings, a MEP told the UK sub-committee investigation into rating agencies.
MEP Dr Wolf Klinz told the House of Lords EU Sub-Committee A (Economic and Financial Affairs, and International Trade), that regulations had forced institutional investors into solely investing into AAA ratings rather than relying on their own judgement.
He commented: “We should make sure that investors are not offered the excuse that they have simply invested in areas with the AAA rating because we forced them to do so. Investors should assume their own responsibility based on their own assessment. Regulations force them to limit their investment to these areas so we have turned RAs into regulatory rating bodies and that is too much.”
Klinz – who is also chairman of the European Parliament Special Committee on the Financial, Economic and Social Crisis, added that there was an over-reliance on ratings “because we force banks, investment funds, etc. to invest in products only if there is a certain minimum rating exists. Even thought the rating agencies say they only express an opinion”.
Financial secretary to the Treasury Mark Hoban agreed, saying that there were "many concerns that that the ratings are hard wired into the system" which is being looked at by various authorities across Europe. Speaking to the committee, he added: "We need to move away from reliance – we can’t remove it entirely but we should encourage discretion among asset managers."
Klinz added that there had to be more accountability for rating agencies and he would like to introduce a liability scheme.
“Rating agencies should be held accountable to develop the rating in a professional manner and if there is negligent then there should be liability,” he said. “If you look at the sub-prime crisis, agencies developed ratings too hastily so in that particular case I would have held them liable,” he said.
However, Hoban disagreed, warning that this could actually reinforce reliance on rating agencies.
"We are trying to reduce reliance on credit agencies. If an investor can just use the ratings to make an investment decision and and then sue if it goes wrong then that increases reliance," he said.
In addition, he asked: "Also are we creating a new barrier to entering? You could be very afraid to enter the market because of the legal threat you face."
Klinz also attacked rating agencies for making the sovereign debt crisis worse.
“Rating agencies smooth ratings over time and then all of the sudden they start downgrading. Four days before the European finance ministers met, the agencies said they were considering to downgrade certain countries and two days before the meeting they did. This worsens the situation and that is not helpful,” he commented.
Klinz lambasted the “near-monopoly” of the top-three rating agencies and said that “this is not normal competition”.
He added: “There is not normal competition. I would like to increase competition by introducing a European agency or even if we have another rating agency elsewhere, such as an Asia agency then that would be fine.”
Updated to include comments from Mark Hoban
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