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Rating for answers

What is the point of a rating agency that cannot predict when a company, bank or fund is not fit for difficult times? That is a question which I think the big global agencies should be answering themselves.

But unfortunately at the time of writing, they are not. So let me first as editor of Money Marketing extend an invitation to any agencies who wish to make the case for why their role is still vital to do so.

But in the absence of this, I am going to try and set out the problem. We believe that agencies sell themselves to the financial world, whether that is the retail market or big institutions or indeed Governments, by their ability to rate institutions and give the market some idea of how sound these players are.

Recently they seem to have failed in this task. There has been a failure to predict what firms may go wrong, suggesting that the agencies have been just as baffled as almost everyone else by the speed and complexity of many financial instruments and the exposure of many global institutions to them. But it has been worse than that – the agencies have become embroiled in the problem themselves.

When banks collapse and huge insurers nearly do so, cutting a rating can almost self-prophesise the event. This is particularly the case when certain deals with other banks and insurers fall through if that rating is cut. The agency becomes part of that contagion or certainly an aggravating factor. Perhaps some of these conflicts are beyond resolution. But that does not justify agencies getting things plain wrong and it does at least beg an explanation as to how the issue can be addressed.

In the past, serious mistakes were made surrounding insurance company fail- ures too. We recall issues over Equitable Life’s near failure and the crisis around Standard Life before its dumutualisation. It is also possible to point out fund ratings which did not catch out fund managers who were way off the supposed terms of their investment remit. After these events, the rating agencies suffered criticism from among others this newspaper, some analysts and some IFAs. But with a PR tactic of saying very little and keeping their heads down, the agencies largely got away with things. Awkward questions were allowed to hover in the air until the winds of some other story blew them away. Headlines were ignored until the papers and magazines concerned went off to the recycling. But this time, given the failure around Lehmans and arguably AIG, preceding its rescue, rating agencies appear to have let down IFAs very badly, not to mention the global economy as a whole.

A European Union commissioned inquiry may drag some answers out but we wonder if it will go the way of many such inquiries and generate criticism without action.

Perhaps what we need is the market to demand change instead. We think this time around IFAs are well within their rights to start asking what service is being provided by these agencies and whether they are correct to rely on them at all.

Money Marketing would also welcome evidence of where these agencies failed in the past to help with our research. Perhaps it is time readers started to rate the ratings agencies themselves.

John Lappin is editor of Money Marketing

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