UK - Investors have backed calls for the reform of credit ratings agencies (CRAs) after identifying a lack in professional conduct, according to the Chartered Financial Analysts (CFA) Institute.

According to an opinion poll of its chartered financial analyst members, more than half of the respondents who have witnessed a rating change believe this was motivated by the agency's hope for future business from an investor, issuer, or underwriter.

The institute found 55% of the respondents agreed with the statement that CRAs should group themselves into an international standard-setting and monitoring self-regulatory body, of all stakeholders, with powers of enforcement.

Branding the result as "disturbing", Charles Cronin, CFA, head of CFA Institute Centre EMEA said the poll suggests there are "serious deficiencies in professional conduct at CRAs."

He added: "CRAs need to take prompt action to manage or eliminate conflicts of interest in the ratings business."

The results of the CFA Institute member opinion poll found 211 (11%) of the 1,956 respondents had witnessed a credit rating agency (CRA) change its rating in response to pressure from an investor, issuer, or underwriter.

"A staggering 51% of the respondents who witnessed a ratings change believed this was motivated by the prospect that issuers would take their business to a competing CRA and 17% were of the opinion that the promise of future business from the issuer motivated a CRA to change ratings," said the body.

A recent report by KPMG International into the impact of the credit crisis on investment managers also showed a general concern in the global investment community about conflicts of interest at CRAs.

The study, presented last week at the Fund Forum in Barcelona, polled mainstream fund managers, alternative investment managers, investors and other investment professionals globally, and found on top of a worry about conflict of interest, 88% of respondents think a lack of understanding about the instruments being rated is a concern in respect of the rating agencies.

The Bank for International Settlements (BIS) also published a report last week arguing the credit market turmoil has raised questions about the effectiveness of credit rating agencies' assessments of risks in rating structured finance products.

The study group report on ratings in structured finance, under the chairmanship of Nigel Jenkinson of Bank of England, sets out a number of recommendations to address weaknesses of ratings of structured finance products.

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

Topics