Thursday, 23 February 2017

Article Preview: ‘Credit Rating Agency Regulation in the UK If and When Article 50 is Invoked: Round Holes for a Square Peg?’

This short post previews an article that this author has had accepted recently by the European Business Law Review, scheduled for release in 2018. As the issue has just been raised in the financial press, it is worth going over the central thesis of the article and discussing some of its applicability to a forthcoming issue with regards to the regulation of credit rating agencies in the U.K. after it secedes from the E.U.

The article develops on the basis that the U.K. will trigger Article 50 and secede from the E.U., and that the terms will be such that the often-stated notion of a ‘hard-Brexit’ comes to fruition – in such a case, the U.K. will need to directly regulate the rating industry for the first time, because up until now the European Securities and Markets Authority (ESMA), i.e. the European financial regulator, has been tasked with overseeing the regulation of the industry, with the U.K. having to designate a ‘competent authority’ to act as the regional supervisor of the industry within its jurisdiction. The U.K. has so far designated the Financial Conduct Authority (FCA) as the competent authority, but this can be seen as a natural progression from the now-defunct Financial Services Authority’s designation of that role beforehand. The question the article asks is whether the FCA is the correct organisation to take on the supervision of the rating industry full-time after Brexit, if needs be (a so-called ‘soft-Brexit’ may still be negotiated), or whether there are other agencies within the U.K.’s regulatory framework that would be better suited.

The article goes on to examine the strengths and weaknesses of the other major components of the British regulatory framework, namely the Prudential Regulation Authority (PRA), and the Financial Reporting Council (FRC), as both have expertise that may be useful in designing the new framework to be built around the agencies. The PRA has a number of positive elements in this regard, but the ‘macro’ nature of its mandate mean that it may have difficulties in monitoring an industry such as the rating industry with the commitment and expertise it requires. The FRC on the other hand have direct experience of minutely monitoring an industry similar to the rating industry, the accounting industry (similar by way of its usage, and oligopolistic structure). However, the FRC’s track-record is not the best when it comes to remaining impartial in relation to the industry it is regulating, and is committed to a joint-effort with the industry, which the article suggests would be catastrophic with the ratings industry, given its extraordinary venal nature. Ultimately, the FCA is a good option for the U.K. Government, but it still has a number of problems which will only be exaggerated if it were to take sole charge of regulating an industry like the credit rating industry.

The article concludes by looking at the notion of a specialised ‘office’, which has been discussed in a previous post in Financial Regulation Matters. Ultimately, the issue remains that there is a potential of the need to regulate an incredibly venal industry in a time were the U.K. will be looking to retain its status as a financial power – it is hard to believe that the U.K. Government will see increasing regulations as a way to maintain that position in a world where it is without the economic support provided by being part of an economic bloc. President Trump, just days into office, began scything away at financial regulations, rightly or wrongly, and this is demonstrable of the new sentiment to have enveloped western Governments – it is starting to be seen as normal that we should once again fall at the feet of big business and hope that it does not attack us once more; the often-attributed statement of Albert Einstein seems particularly apt here:


            Insanity: doing the same thing over and over again and expecting different results.

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