Brexit casts doubt over rating agencies’ future in London

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No UK regulator yet ready to take over from Paris-based watchdog

Credit rating agencies’ activities in London have been thrown into doubt by Brexit, as the UK government faces the prospect of cobbling together a new regulatory regime for institutions often blamed for exacerbating the financial crisis.
The regulation of rating agencies, which grade the creditworthiness of companies and countries, shot up the political agenda after 2008 because of the agencies’ perceived failure to anticipate deep problems in the banking system and elsewhere.

But in Britain, the European hub for the big three rating agencies, they are overseen only by an EU watchdog — and no UK body is yet ready to step in.

The UK government may have to outline alternative arrangements in its Great Repeal Bill, the planned act of parliament that seeks to transpose and adapt EU law to the UK statute book. But financial professionals warn that it could take many months to prepare either the Financial Conduct Authority or the Bank of England, the two most likely candidates, to take over the tasks currently carried out by the Paris-based European Securities and Markets Authority (Esma).

Such a transition would have to be put into effect within the two-year period between the beginning of the official Article 50 divorce process next month and Britain’s eventual departure from the EU. “If we exit Europe, we become unregulated; that’s a problem,” said a senior official at one of the largest rating agencies.

“We would want to make sure users of our ratings in Europe are not disrupted. Part of the fix would be for the UK to give supervision of credit rating agencies to the FCA.” Esma also supervises so-called trade repositories, data warehouses that provide authorities with information on derivatives trade.

But even if the FCA or BoE does take over supervision of rating agencies, such oversight may not be recognised as adequate by the EU, deepening the uncertainty facing the strategically important sector. The largest three agencies alone — Standard & Poor’s, Moody’s and Fitch — employ 1,400 people in the UK, generating £600m.

The London hub could also risk the agencies’ European business. While between them the “big three” control 93 per cent of European revenues, EU rules stipulate that European countries are only allowed to use ratings from an agency registered with Esma.

Ratings from agencies in non-EU countries can be certified with Esma if their home country regulations are deemed equivalent, a finding that the European Commission can reverse at 30 days’ notice.

People in the industry forecast that the rating agencies would probably be forced to issue European ratings from their existing Esma-registered continental offices, even if the UK regime is recognised as equivalent. But such a change may result in moving hundreds, rather than thousands, of jobs from London.

The issue is “on the radar” of both the Treasury and the FCA but there have been no formal discussions about how to proceed, according to people familiar with the situation.

“The UK will have to decide what regime it wants,” said David Lawton, the FCA’s former head of markets, now at Alvarez & Marsal. “There would be a lot of advantages from the regulatory point of view, and that of the agencies themselves, to having something pretty closely aligned to the current regime.”

The FCA confirmed it was for the government to decide whether it or the BoE should have oversight of rating agencies and trade repositories. It declined to comment further, as did Esma. Moody’s and S&P declined to comment. Fitch said it would maintain a “strong and constructive dialogue with its regulators”.

Rating agencies’ activities have become more controversial in the past decade, with many commentators arguing that their overly optimistic ratings of complex securities exacerbated the run-up to the financial crisis.

The G20, of which the UK forms part, required its members in 2008 to adopt tighter scrutiny of credit-rating agencies. Mark Carney, BoE governor, also chairs the Financial Stability Board, which makes regulatory recommendations to the G20.

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