Standard & Poor’s, Moody’s, Fitch: credit rating agencies were soon believed to be one of the sponsors of the credit crunch. Although there is of course a lot more to say about that, what is for sure is that their ratings proved an important link in the process of ‘securitisation’ of sometimes shaky mortgage loans into more prevalent stocks. In 2009 the European legislator therefore adopted a regulation on credit rating agencies. This regulation contained rules on the independence of credit rating agencies, their staffing, methodologies, disclosure and presentation of ratings, as well as a system of registration under the auspices of the European Securities and Markets Authority (ESMA).
Just a month ago, a new regulation supplemented the 2009 regulation with, amongst other things, civil liability of credit rating agencies towards investors and issuers, in the new Article 35a(1):
Where a credit rating agency has committed, intentionally or with gross negligence, any of the infringements listed in Annex III having an impact on a credit rating, an investor or issuer may claim damages from that credit rating agency for damage caused to it due to that infringement. (…)
This is remarkable. The European legislator usually remains silent on the private law effects of its legislation in the field of financial law, such as the Markets in Financial Instruments Directive (MiFID). This directive contains detailed conduct of business rules for financial institutions in relation to their clients. Also last month, the European Court of Justice confirmed that it is up to national law to determine the ‘contractual consequences’ of violation of a particular MiFID-rule, albeit ‘subject to observance of the principles of equivalence and effectiveness’. The private law effects of this directive, at least, thus remain uncertain.
The explicit creation of a specific tort on the level of EU law itself in the supplemented regulation on credit rating agencies seems to mark a new approach. The European legislator makes clear from the start that investors and issuers may seek redress under private law if they suffer damages as a consequence of a rating infringing the regulation rules. Also in the absence of a contractual relationship.
Yet creating such a European tort brings its own uncertainties. So far, a comprehensive European tort law framework does not exist, at least not outside academic desk drawers. The supplemented regulation on credit rating agencies does not provide for such an encompassing liability regime either. Any civil liability for credit rating agencies will therefore still have to rely on national tort law heavily, as the regulation also acknowledges, even for the interpretation of cornerstone terms such as ‘damage’, ‘intention’ and ‘gross negligence’ or the concept of causation. By that, such liability also implies an important role for private international law, to determine whose national law is applicable in the first place, adding more uncertainty.
Apart from that, thresholds for liability are high. For credit rating agencies to be actually liable, they will have to infringe rather detailed, but also often – at least for the time being – rather vague rules, the infringement of which has to have ‘an impact on a credit rating’. Moreover, they will have to do so ‘intentionally or with gross negligence’, while the claiming investor has to establish that he has ‘reasonably relied’ on the rating for an investment decision and the claiming issuer that the rating was not based on misleading information provided by himself. Although the introduction of civil liability of credit rating agencies by a specific European tort thus seems to mark a new approach, it remains to be seen whether it will really make a difference.