The Central Bank tightens regulation of the rating industry

Regulation of the rating industry is being tightened. From the end of December, the Bank of Russia will be able to apply new measures of influence: withdraw ratings and prohibit their assignment if violations are found in the relevant agencies. The new powers of the Central Bank should help in case of unfair competition, when players unreasonably raise their ratings in the fight for customers. But it can also reduce agency independence.

From December 20, 2023, the powers of the Central Bank in relation to supervision over rating activities will expand: the regulator will be able to issue instructions to credit rating agencies (CRA) in practice to withdraw or revise credit ratings, as well as to prohibit their assignment. This follows from the published on the portal regulation.gov.ru draft instructions.

As the Central Bank explained to Kommersant, the requirement to withdraw or revise the rating will be applied if it was assigned in violation of the legal requirements for preventing conflicts of interest, the work of analysts and the rating committee, checking the quality of the methodology by the KPA, and the ban on assigning ratings – in case of non-performance , violations of the terms of execution of the instructions of the Central Bank to eliminate violations, as well as requirements for withdrawal or revision of the rating.

According to Nikolai Titov, co-founder of ATLegal, an example of such a violation could be the presence of an analyst with pension savings in the NPF, in respect of which the rating is being assigned, if he can influence the work of the fund.

The innovation, according to the Bank of Russia, ensures “greater proportionality” of enforcement measures to “violations identified in the activities of the CRA”, and helps to increase the responsibility of agencies for the quality of ratings. Data on the number of violations of the KRA in the Central Bank was not disclosed.

Kommersant’s interlocutors in the market assess the new toolkit as impressive, but it can both have a positive impact and have negative side effects. Marina Chekurova, General Director of Expert RA, notes that the responsibility of agencies to investors has increased manifold against the background of “information asymmetry” (clients disclose a significant part of it to the agency on NDA terms, while public information is now limited).

According to ACRA CEO Mikhail Sukhov, strengthening supervisory powers is a way to improve the quality of ratings: “It can achieve its goal if the Central Bank regularly monitors the validity of rating actions of agencies, strengthens the resource support for this function, primarily to increase the number of its own ratings assessments CRA.

The independence of agencies against this background will “change”, but with a consistent and equal approach of the Central Bank to all agencies, such changes are “justified from the point of view of users,” Mr. Sukhov believes. According to him, the strengthening of supervisory powers should not become the only tool for improving the quality of ratings, “market discipline should be developed.” The NKR and NRA declined to comment.

According to banking expert Olga Ulyanova, who has fifteen years of experience at Moody’s, the new powers of the Central Bank look serious, but it is important how the regulator will apply these measures in practice: “Concrete cases will demonstrate whether they will have a positive impact on the quality of rating services or will put pressure to their independence.” ADB Vice President Alexei Voylukov hopes that the use of the new instrument will be “cautious” and the market will not be “hard clamped” after that.

According to Ms. Ulyanova, at the moment the Russian rating industry “more or less” reflects the standards of international practice laid down by the world’s top three rating agencies, but the independence of national agencies is still “extremely fragile.” “The Russian market needs to develop a culture, if you like, the DNA of independence,” she says.

This is manifested in many things, the expert adds: “Chinese walls” between the activities of the analytical department and the department responsible for business development, the absence of pressure from senior analysts on junior ones, the independence of judgment of each member of the rating committee, the ability to appeal to international practice, the presence of effective competition . As regards the latter element, Ms. Ulyanova believes, “a fair balance has not yet been reached, and the risks of rating levels being manipulated for competitive purposes remain.”

Olga Sherunkova