German Financial Institutions Claim Rating Agencies and their Ancillary Services Pricing Need to be more Transparent

In this post, we will review the story today that a number of leading German financial institutions are taking aim at the Big Three credit rating agencies, specifically in relation to the fees they charge for their credit rating-related data feeds. This issue of transparency, particularly with regards to the provision of ancillary services, their cost, and the impact that it has upon the rating dynamic moreover, is not a new phenomenon. In fact, this was the very subject of my 2018 book Regulation and the Credit Rating Agencies; Restraining Ancillary Services which you can preview here, and purchase here.

 

In news published by Reuters today, it was stated that the Fund Association BVI, and the Insurance industry body GDV are in the process of making a joint appeal to the European Commission regarding the lack of transparency over the pricing structures from the ancillary service-wings of the credit rating agencies. The BVI today declared that the rating agencies are exploiting their market position by setting their pricing for such data at certain levels, with Thomas Richter the CEO being of the opinion that ESMA does not have the tools to bring such practices to an end. One reason for this discrepancy in pricing approaches – the credit rating agencies do not publish how much it costs to access such historical and current credit rating-related data in full, but it has been suggested that it can be more than £100,000 per year – may be that the arms of the rating agencies are not deemed to be part of the rating ‘group’, as BVI is claiming. Fitch Ratings, the only credit rating agency to respond to this news so far, has said that any data coming from ‘Fitch Solutions’ is coming from in independent component of the group and, as such, is not connected to the ratings arm of the business. For its part, Fitch does not believe that a change in the regulations is required. However, a large number of market participants purchase access to this data because it helps them, or at least aids them in complying with accounting or other regulatory reporting rules. Yet, the joint-appeal is also based on the belief that the price of accessing this data is ‘becoming an increasing important “competitive” factor’, which falls in line with research from my book (linked above) that suggests that ancillary service provision is actually one of the key drivers maintaining the status quo in the credit rating industry.

 

This has been analysed before, and Joffe and Partnoy noted in 2018 that access to the totality of the data available is not something the credit rating agencies allow – they only allow access to individual ratings and, even then, this is limited. In order to access such data, models such as Moody’s Ratings Delivery Service and S&P’s RatingsXPress exist to allow users access to large databases – but for a price which is not advertised. One of the key arguments of Joffe and Partnoy was that such data should be publicly available, and it not being so prevents scrutiny from researchers and other interested parties. Regulatory efforts in the US have made little difference, with rating agencies not properly complying with the spirit of the regulations and, when researchers do get access to such data, they rarely have the expertise to decipher it. Joffe and Partnoy note a number of organisations and projects that have attempted to collate and decipher this data, including GitHub, www.ratingshistory.info, and Data.World.

 

However, BVI and GDV are pushing for something a little different, arguably. Whilst the content of the issue is the same, by pushing the European Commission to consider their appeal, the issue of US-centric agencies coming into conflict with the EU could be intensified, particularly after MEPs have already called for more regulatory intervention in the sector. This could be the starting point for ESMA to receive more powers in relation to regulating the industry, or could lead to greater transparency with regards to corporate structures in the EU, and what can be considered as the rating group moreover. This latter potential outcome is unlikely, because questioning the corporate structure of the rating agencies can lead to the questioning of other industries which may not be ideal. However, the provision of ancillary services is massively impactful upon the trajectory of the rating agencies. I demonstrated in 2018 that the ancillary service arms of the Big Two rating agencies in particular provide buffers, and then some, against any regulatory penalty that would be levied against the agencies in light of their actions during the Crisis, and this was proven to be the case when the cumulative financial penalty of more than $2 billion has been dwarfed by the profits made from the ancillary wings during the same era. More needs to be made of this relationship because it is massively impactful, and the German push to do so may shine more light on a sector of the rating dynamic that is almost accepted as natural. It is not. The provision of ‘consultancy services’ in the accounting/audit industry has been rightly identified as being massively impactful on the core purpose of an auditor, and their divestment is an active regulatory aim in many countries – there is no reason why the same regulatory approach should not be considered in the rating industry. Perhaps the first step is to understand their position within the rating agencies’ hierarchy, and then how much they are charging for the privilege of access.

 

Keywords – credit rating agencies, data, transparency, Germany, @finregmatters