2011 CREDIT RATING SERVICES BILL TO REGULATE CREDIT ASSESSMENT SERVICES
The activities of the five credit rating agencies (CRAs) operating in South Africa are, generally, unregulated.
There is limited regulation in terms of the Banks Act, 1990, relating to use of credit assessments performed by an external credit assessment institution or export credit agency.
The Credit Rating Services Bill is intended to address the need for regulation of these services, given that credit ratings carry considerable weight in financial markets and are used by banks, municipalities and most fund managers in South Africa when investing funds.
From the date when the Credit Rating Services Bill is enacted into law no person will be allowed to perform credit rating services or issue a credit rating unless that person is registered as a credit rating agency.
This requirement follows the G20's recommendation and the International Organisation of Securities Commission's principle that CRAs whose ratings are used for regulatory purposes should be subject to a regulatory oversight regime that includes registration.
Accordingly, a regulated person (one granted authority to conduct business or activities by any regulatory authority) will be restricted to using only those credit ratings issued or published by registered CRAs.
When the Credit Rating Services Bill is enacted, a CRA will have the following duties:
(1) to maintain the independence and accuracy of its credit ratings and services, as well as its continuity and regularity in the performance of such services;
(2) to establish and maintain systems to protect issuers' confidential information; and
(3) to review and maintain a high standard of rating methodologies.
A CRA will, however, only incur liability for credit ratings or credit rating services performed maliciously, fraudulently or negligently.
Each CRA will also be required to adopt a code of conduct, which it will be required to disclose to the public and its subscribers, along with:
the disclosure of its methodologies;
the general nature of its compensation arrangements;
its policy on publishing credit ratings; and
data about the historical default rates of its rating categories.
Whilst a CRA will have the duty to maintain the independence of its credit ratings, the Credit Rating Services Bill grants the registrar a discretion to suspend the registration of or to deregister a CRA.
He may, however, only exercise this power in limited circumstances and his decision may be taken on appeal to the board of appeals established in terms of the Financial Services Board Act.
CRAs may not, without the registrar's approval, outsource their operational functions, nor provide other services besides credit ratings services. Other powers, which are wide-ranging and extend far beyond his oversight and enforcement duties, include the power to prescribe rules for the design of rating methodologies and models, and rating assumptions.
The Bill does not, regrettably, make a separate provision for sovereign credit ratings despite the impact of such credit ratings recently being highlighted in South Africa and in other countries. Be that as it may, the problem of specifically regulating sovereign credit ratings is that it may call into question their independence and accuracy.
This overview of certain notable aspects of the draft legislation is based on the draft published in July 2011. No date has been given for the enactment.