Neither Western nor Canadian proposals for improving credit rating agency (CRA) efficiency will be effective, according to the latest report from the Canadian non-profit C.D. Howe Institute.
In response, the company in a paper titled A Question of Credibility: Enhancing the Accountability and Effectiveness of Credit Rating Agencies proposed three additional areas of reform that need to be considered for further refinement.
These include eliminating regulatory references to ratings, developing due diligence obligation for institutional investors about issuer creditworthiness, and issuers disclosing data on the underlying assets in structured finance products.
“Canada’s response so far, like those in the U.S. and [European Union], doesn’t go far enough and arguably goes in the wrong direction by adding another layer of cumbersome regulation,” said Stéphane Rousseau, chair of business law at Université de Montréal and author of the paper in today’s press release.
C.D. Howe said that in the aftermath of the financial crisis, CRAs were attacked for their significant role in creating the market uncertainty as the quality and reliability of the rating process came into question.
As a result, there has been a strong consensus among policymakers in Canada, Europe, and the U.S, that this issue needs to be addressed through policy action, specifically opting for registration systems.
However, that recommendation would create competition, encourage unwarranted reliance on ratings, and unduly burden regulators. Rousseau said that the Canadian Securities Administrators (CSA) had to shift away from the disclosure-based registration regime that they had proposed in Consultation Paper 11-405 because of compatibility issues with the European framework.