Credit Rating Agencies (CRAs) publish ratings in the form of statements on the general creditworthiness of issuers or obligors. They do so on behalf of investors in loans of companies, semi-public bodies or States on the basis of quantitative and qualitative analysis of the financial strength of these issuers. Well-known names are Standard & Poor’s, Moody’s and Fitch. All types of limiting conditions accompany these opinions. The lack of accountability of credit rating agencies after the financial crisis sparked the EU to establish in 2013 a civil liability regime under Article 35a of the CRA Regulation. The provision easily fills one A4. Its paragraph 35a(1), first sentence commences with: ‘Where a credit rating agency has committed, intentionally or with gross negligence, any of the infringements listed in Annex III having an impact on a credit rating, an investor or issuer may claim damages from that credit rating agency for damage caused to it due to that infringement’. The terms ‘committed’, ‘intentionally’, ‘gross negligence’, ‘damage’, ‘caused’ evidently raise the issue how these will be interpreted. Which court has the competence to do so and which laws do apply? The paragraph continues with what an investor may do: he may claim damages where it establishes that it ‘… has reasonably relied, in accordance with Article 5a(1) or otherwise with due care’, on a credit rating for a decision to invest into, hold onto or divest from a financial instrument covered by that credit rating. Again, a vague term which can bend in all type of directions.
In her Leiden PhD, Dorien Verheij has analysed the full Article 35a CRA Regulation, triggered by its remarkable structure. The defence was last week. The PhD supervisors were professors Matthias Haentjens and Alex-Geert Castermans. The basic ground for a civil liability is European, but in general tort law Member States’ national laws are not harmonised. So, the basis in an EU Regulation, whilst its constituent elements are to be analysed according to national law. That triggers the question: how to interpret the combination? Her book investigates Article 35a CRA Regulation from multiple legal perspectives, combining EU law, private international law (which court has jurisdiction; which law is applicable) and Dutch, French, German and English national private law. During her detailed study she answers the main question of whether Article 35a CRA Regulation achieves its post-financial crisis goal of being an adequate right of redress for issuers and investors whilst it has to be interpreted under various systems of national law. In answering this question – negatively – her study is much broader in that it takes a broader European approach and also rates the usefulness of Article 35a CRA Regulation as a European template for civil liability to be used by the Union legislature. In her journey a broader view is taken, as in general financial sector regulation includes ex ante (sometimes golden) threats of public interest, public supervision and enforcement, by specific administrative agencies, whilst – with respectable history – civil liability is an ex post mechanism, dealt with by a civil court in which party A claims from party B compensation for damage suffered.
A multi-coloured quilt
From this perspective, Verheij argues, that Article 35a CRA Regulation is exemplary for the approach taken by the Union legislature in private law matters. Its structure is unique, especially where Union legislature in the area of EU financial law increases, but national civil liability regimes continue to play a large role. Issuers and investors can base a claim directly on Article 35a CRA Regulation, but Article 35a CRA Regulation is not an independent and autonomous EU legal basis for civil liability. Verheij certainly is a strong proponent of increasing the level of protection of issuers and investors, and to enhance legal certainty. To that end, Verheij recommends that the Union legislature changes the structure of Article 35a CRA Regulation in two ways: (i) by imposing more detailed obligations on Member States by describing when issuers and investors are entitled to damages under the applicable national law; and (ii) by extending the current system under Article 35a CRA Regulation by severely reducing the importance of the applicable national law. Other recommendations she makes include restricting the use of exclusive jurisdiction clauses in favour of the courts of third countries and including specific rules on jurisdiction and applicable law within the CRA Regulation. She seems more hesitant in suggesting that the Union legislature could consider relaxing the requirement of reasonable reliance and on deciding what type of investor loss is eligible for compensation by analysing the initial justification for credit rating agency liability and restricting the opportunities for credit rating agencies to limit their civil liability in advance or in providing more detailed substantive guidance on terms such as ‘gross negligence’. Verheij also elaborates on other options to avoid the problematic combination of EU law and national law within EU rights of redress. In all, where there is just little political compromise because the different views regarding the desirability of a right of redress, the present status of the regulations receives her rating: it is generally rated below investment grade.
The question of providing a more detailed substantive guidance on terms such as ‘gross negligence’ sparks another question: should it take the form of a sort of Explanatory memorandum, and if so, wouldn’t that raise the same question again: can the concepts to be used be explained autonomously and, if so, how are they interpreted? Through more extensive recitals? I fear part of the problem is just shifting. The study is a fine example of the intricate interplay between financial regulation and civil liability in the legal order of the EU. Overall, the book underlines the need to fundamentally rethink the concept of civil liability (even more broad: private law in general) as an instrument in European financial law.
D.J. Verheij, Credit rating agency liability in Europe. Rating the combination of EU and national law in rights of redress.
The Hague: Eleven international publishing 2020. ISBN 978-94-6236-144-7