How are rating agencies regulated

Fully regulate rating agencies!

09.09.2020Column
Capital investment column

As a long-standing business lobbyist and out of deep conviction, I regularly defend myself against excessive regulation. But if the market situation is not different, it is inevitable. The oligopoly of S&P, Moodys and Fitch harms investors, the capital market - and ultimately also consumers.

Force due to their market power Rating agencies regular disproportionate fee increases.

© Getty Images / Matjaz Boncina

The self-portrayal of our association reads: "As risk bearers and significant capital providers (investment portfolio around EUR 1.7 trillion), private insurance companies are also of outstanding importance for investments, growth and employment in the German economy." Which brings us straight to the topic : We insurers are concerned about the business practices and dominant position of the three major US rating agencies. S&P, Moody unds and Fitch actually form an oligopoly, the consequences of which damage investors and impair the efficiency of the capital markets. In the end, the associated costs are also borne by the consumer.

European laws increasingly require us to use ratings, for example for the Solvency II supervisory system

Why is that? External information on creditworthiness is indispensable for European insurers, fund managers and other financial market players such as banks, not least for regulatory reasons. As one of the largest institutional investor groups in the European Union, insurers are regular natural users of rating data for investment management, risk management, compliance and regulatory reporting as well as for accounting purposes. European laws increasingly require us to use ratings, for example for the Solvency II supervisory system. For this reason alone, our industry is de facto forced to work with three companies from a dominant oligopoly. While the areas of the rating agencies that do the actual analyzes are now strictly regulated as a result of the financial market crisis of 2008, other parts of the rating groups are still completely unregulated. This includes in particular the units that sell the rating data to users such as insurance companies around the world via license agreements.

You do not need to be a graduate of an economics degree to assess the consequences: Due to their market power, the aforementioned rating agencies regularly force disproportionate fee increases.

"I say to rating agencies: Unless the market situation dictates otherwise, regulation is inevitable and in full - without loopholes."
Jörg von Fürstenwerth,
1996 - 2020 chairman of the GDV management

As a long-standing business lobbyist and out of deep conviction, I regularly defend myself against excessive regulation. The maxim is: “As much as necessary, as little as possible.” I say to rating agencies: Unless the market situation dictates otherwise, regulation is inevitable and in full - without loopholes. Together with the German fund association BVI, we therefore appeal to the EU Commission to regulate and monitor more closely the American rating agencies with regard to the pricing of rating data.

The European Securities and Markets Authority ESMA had previously consulted users of rating information and asked for their comments. You can read about our association here.

Jörg von Fürstenwerth

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