5 June 2009

Minister Welcomes Roundtable Report On Ratings Users and Accepts Regulator Update on Licensing

Senator Nick Sherry, Minister for Superannuation and Corporate Law, has released a report on ratings user reforms, compiled by Treasury and the Australian Securities and Investments Commission (ASIC), following two roundtables held in March with banking and finance industry groups.

The report contains four recommendations, all of which are accepted by the Government. The recommendations are: (i) for ASIC to consider possible options for investor education addressing over-reliance on credit ratings; (ii) for ASIC to continue to work with rating agencies on progressing their AFSL applications; (iii) for banks and industry bodies to continue their efforts to encourage more informed investment decisions, and (iv) for the Government to continue to make known the benefits and quality of Australia's prudential regulation system.

"The roundtables and the advisory report are part of the Rudd Government's broader consultation process with business and industry on the impacts of the global financial crisis."

"The report makes it clear that banks which input data into ratings processes have an important role to play in ensuring quality ratings, but also that the level of possible over-reliance on ratings in Australia has not been as acute as in other jurisdictions."

"The report also clearly endorses the Government's decision to require ratings agencies to be licensed and for that to occur closely in line with international developments," said Minister Sherry.

The roundtables were attended by the Australian Bankers' Association, the Australian Shareholders' Association, the Association of Superannuation Funds of Australia, the Australian Financial Markets Association, the Australian Securitisation Forum, the Financial Planning Association, the Insurance Council of Australia, the Investment and Financial Services Association and the Securities and Derivatives Industry Association.

In late 2008, the Government announced that ratings agencies would be required to hold an Australian Financial Services Licence (AFSL) by 1 July, 2009, and issue annual compliance reports against the International Organisation of Securities Commissions (IOSCO) Code of Conduct. IOSCO directly endorsed this approach in March 2009.

"All three ratings agencies have now lodged licence applications with ASIC, which is an important step toward boosting regulatory oversight," said Minister Sherry.

ASIC has also written to the Government to update it on the status of the licensing of rating agencies in Australia. As part of that update, ASIC has requested, and the Government has agreed to, a short extension of the licensing timeframe to no later than 1 January, 2010.

ASIC has based its request on significant developments in recent weeks, particularly in Europe, that may impact on the level of obligations placed on ratings agencies in Australia.

"At the regulator's request, the Government has agreed to ASIC and Treasury conducting further discussions with each ratings agency applicant on European and other international developments, to see how they will affect their local businesses and local licensing arrangements."

"I would like to take this opportunity to acknowledge the efforts of ASIC, the broader industry and the ratings agencies themselves, for making considerable progress towards licensing to date," said Minister Sherry.

The current AFSL exemption for ratings agencies will continue to apply until the new licensing commencement date.

5 June, 2009


Reducing Reliance on Rating Agencies

Treasury and the Australian Securities and Investments Commission (ASIC) are pleased to release this report on the key issues raised at the Banking Industry Roundtable and the Industry Association Roundtable on 5 March 2009 concerning improving the quality of credit ratings. This report provides a suggested way forward for responding to the issues raised at the roundtables.


The global financial crisis has highlighted the need for policy consideration of the impact of credit ratings on market integrity, prudential regulation and financial system stability.

International organisations, foreign regulators and Australian authorities have moved quickly to improve regulation of credit rating agencies. On 13 November 2008, following a joint review by Treasury and ASIC, the Government announced that all credit rating agencies operating in Australia would be licensed. Rating agencies will be required to hold an Australian Financial Services licence (AFSL) and to comply with the up-dated International Organisation of Securities Commissions (IOSCO) Code of Conduct as a condition of licensing.

The roundtables were convened to gather input from banks and industry as to the current issues concerning Australian credit ratings, with a view to determining forward recommendations.

Banking industry1

The primary focus of the Banking Roundtable was ratings in the context of sophisticated market participants in the financial system.

The collective view of the banks was that since the global financial crisis there has been an increased eagerness by their counterparties to understand Australia's prudential regulatory system. The strength of this system and the relative strength of the Australian economy are more relevant than ratings for products or the banks themselves.

Greater scrutiny is being applied to the banks' data they provide as part of issuing debt products. Investors are asking more detailed questions of the banks. Banks have been developing a debt investor relations function in recent years to improve communication of information to investors. Bank treasury units get specific questions from foreign investors, as investors are often interested in the Australian bank sector story.

There was a view that in Australia investors have not relied on credit ratings per se. A strong distinction emerged between the regulated and unregulated markets: investors rely much more heavily on ratings when dealing with the unregulated markets.

Other issues discussed include the quality of the ratings process, methodology, and staff and resourcing levels across different agencies, and the reasons underlying ratings revisions.

There was consensus that introducing the AFSL framework could contribute to reducing conflicts of interest, provide greater transparency around the ratings process and ensure better qualified employees at rating agencies.

The Banking Roundtable did not suggest that a banking industry-wide set of measures was required. Nor did they believe that specific action was required from the Government. However, the Roundtable welcomed and supported the efforts of the Government and the Treasury in clearly communicating the strength of Australia's economy and quality of Australia's prudential regulatory framework. They believe that the credibility of these information sources is crucial to overseas entities understanding Australia's circumstances.

Financial services industry2

The primary focus of discussion at the Industry Roundtable was on retail investors and mechanisms to reduce investor reliance on credit rating agencies.

Doubts were raised about the effectiveness of education efforts and disclaimers generally. It was felt that any attempts to tackle investor over reliance on ratings through similar means might have limited impact. There was some agreement that this course of action was appropriate but no concrete measures were fully developed during the discussion.

The main issue raised at the Industry Roundtable was whether improved regulatory oversight of credit rating agencies alone was sufficient to improve the quality of ratings. The notion of introducing a duty of credit rating agencies to investors was discussed. Such a move could improve their accountability for poor or ineffective ratings, arguably improving ratings. However, it was also noted that introducing a duty of credit rating agencies to investors may lead to credit rating agencies potentially leaving the market. In addition, any court action would be costly and lengthy if such legal action did eventuate.


  • ASIC will consider possible options for investor education addressing over-reliance on credit ratings.
  • ASIC will continue to work with credit rating agencies in progressing their AFSL applications.
  • The banks and industry bodies should continue their efforts to encourage more informed investment decisions.
  • The Government will continue to make known the benefits and quality of Australia's prudential regulatory system.

Treasury and ASIC agree that successfully applying the AFSL framework to credit rating agencies is the current priority. The view was expressed at the Roundtable that Australia is in a different position to some other countries in retail penetration and exposure to credit ratings, for example, through superannuation. We are of the view that in these circumstances Australia must carefully consider its policy options, taking into account movements by overseas regulators. We believe the Government should continue to monitor international regulatory developments, and for industry to do likewise concerning their international counterparts.

1 Attendees included the Commonwealth Bank, NAB and Westpac. The Australian Bankers' Association attended as an observer. Unfortunately, ANZ was unable to attend.

2 Attendees included the Australian Bankers' Association, Australian Shareholders' Association, Association of Superannuation Funds of Australia, Australian Financial Markets Association, Australian Securitisation Forum, Financial Planning Association, Insurance Council of Australia, Investment and Financial Services Association and the Securities and Derivatives Industry Association.