CSA adopts regulatory regime for credit rating agencies

The rule establishes a regulatory framework for the oversight of credit rating organizations by requiring them to apply to become a ‘designated rating organization’ and adhere to rules concerning conflicts of interest, governance, conduct, a compliance function and required filings. Until now, the rating agencies have not been subject to any formal regulatory oversight.

Initially, Canadian regulators were proposing a less onerous regime that would have only required the credit rating agencies to comply with regulatory requirements, or explain why they chose to deviate from the requirements. However, it became clear that this approach would likely not be acceptable to European regulators, meaning that Canadian ratings may not have been able to be used in Europe.

So, in March of last year, the CSA proposed amendments to the rule, which included feedback received from the European Security Markets Authority on the equivalency of the proposed Canadian regulatory framework. In response to the comments received on that proposal, minor amendments have been made to enhance the rule, the CSA says, noting that the rule is designed to be consistent with international regimes and European Commission endorsement and certification provisions, so that European market participants can rely on ratings from Canadian credit raters.

“The CSA recognize the significant role credit rating organizations play in today’s global credit markets,” said Bill Rice, chair of the CSA, and chair and CEO of the Alberta Securities Commission. “By considering international developments while creating the Canadian regulatory regime for credit rating agencies, the CSA has set appropriate standards for credit rating agencies that are also consistent with international regimes.”

However, Canadian regulators are not following the lead of some jurisdictions to impose greater civil liability upon rating agencies. “We are not at this time proposing such changes because we do not think that the benefits of subjecting designated rating organizations to “expert” liability in Canada would outweigh the potential costs,” the rule says.

The new regime is due to take effect on April 20. In some jurisdictions, legislative changes and ministerial approvals are required to fully implement the new regime. The CSA reports that in Quebec, Ontario, Alberta, British Columbia, Manitoba, New Brunswick and Nova Scotia the enabling legislation is either already in force or awaiting proclamation. In Saskatchewan, the enabling legislation will be proclaimed later in the spring.