CRA 3 and the liability of rating agencies: inconsistent messages from the regulation on credit rating agencies in Europe

Abstract

On 31 May 2013, Regulation (EU) No 462/2013 (“CRA 3“), containing the latest amendments to Regulation (EC) No 1060/2009 on credit rating agencies (the “CRA Regulation”), was published in the Official Journal. CRA 3 represents the third instalment of Europe's legislative response to the perceived role played by credit rating agencies during, and since, the financial crisis. Although the purported overall theme of CRA 3 – to discourage sole and mechanistic reliance by investors on credit ratings – is laudable, the amendments it introduces to the CRA Regulation nevertheless include the most radical provisions yet, and some of these may ultimately produce consequences that are both unintended and contrary to the stated theme. Whilst the passage of CRA 3 through the European legislative process resulted in the removal of some controversial proposals, what remains includes two provisions worthy of particular attention: the mandatory rotation of rating agencies for resecuritisations; and a new civil cause of action against rating agencies in favour of investors and issuers for breaches of the CRA Regulation. The result is legislation which risks failing to meet its objective and may even impact on the willingness and ability of rating agencies to provide the breadth of ratings coverage that they have hitherto done.