Regulation and Liability of Credit Rating Agencies – A More Efficient European Law?

Credit rating agencies are said to be among those who caused the financial crisis. Both the United States and Europe have passed numerous laws intended to monitor them more closely. It stands undisputed, however, that these regulations do not suffice to solve the problems that evolved in the financial crisis. This article evaluates the European Commission's latest Credit Rating Agencies Regulation, which introduces, among others, two mandatory rating, sets a time limit on the contractual relationship between Rating Agency and the contracting entity and a civil liability regime. In order to effectively enforce the affected rights, two additional means must be introduced: Mandating a European rating could break the market's oligopolistic structure and help jump-start small European agencies. A civil liability regime can only serve as an incentive to introducing self-control if liability rules are truly deterring: To ensure that wrong ratings (such as Lehman Brothers') will actually lead to enforceable damage claims, the new Regulation needs to introduce a reversal of the burden of proof. This includes requiring the agency to immediately adjust a rating, avoiding an issuer's premature downscaling, and introducing a “rating out-look”. In the article, several recent cases will be reviewed to assess the practicability of the new liability regime