Reigning in the Credit Rating Agencies: Regulation of Credit Rating Agencies in New Zealand

Abstract

Credit rating agencies (CRAs) play a pivotal role in global financial markets. Investors, issuers and governments rely on credit ratings for a variety of different purposes. In New Zealand, the Reserve Bank of New Zealand Act 1989 requires deposit taker to have a credit rating. Yet, CRAs are plagued with problems which have the ability to affect the reliability of their ratings. These problems include conflicts of interest within the industry; the lack of transparency of ratings; the failure of CRAs to independently verify the information they receive; the lack of competition within the industry; and lack of on-going monitoring and expertise. Despite these issues, there are surprisingly few constraints on the behaviour of CRAs because there are few viable means by which investors can hold them accountable for their ratings. As a result, many countries, including the United States and Australia, have moved to regulate CRAs. This paper argues that New Zealand should also regulate CRAs in order to increase their accountability to New Zealand investors. It suggests a number of options for reform, and argues that the best option for reform is to introduce a licensing system under the Financial Advisers Act 2008 whereby CRAs are required to be licensed, abide by general and tailored obligations and be subject to oversight from the Financial Markets Authority.