Rating Agencies let off the hook - for now 

Market structure

The international credit ratings industry is dominated by three companies: Moody’s, Standard & Poor’s and Fitch and is therefore an oligopoly (where so much of the market share for a product/service is held by a small number of companies that those companies effectively control that market). Such market structures have the inherent possibility of being anti-competitive as price does not determine market share. There are a growing number of local agencies in Europe, China and India but the need, by the bond issuers, for a ratings recognition which comes from a long-established firm, effectively bars newcomers from the world stage.

United States

In the US, CRAs came in for huge criticism after the collapse of Enron and Worldcom. The big three agencies had continued to rate Enron as being suitable for investment up to four days before it filed for bankruptcy. The Securities and Exchange Commission (SEC) can designate CRAs as nationally recognised statistical rating organisations (NRSROs) if they comply with certain standards. Only four companies currently hold this designation and some see it as a barrier to entry for new companies. The SEC is now pressing Congress to give it more powers to regulate CRAs. In February 2005 Congress's Banking Committee held a number of hearings on how this could be done. 

The European Parliament, in February 2004, considered an own-initiative report by Giogos Katiforis MEP, in which he recommended the creation of a supervisory European Union Ratings Authority with which agencies would be required to register. Parliament, however, did not back the report and resolved only to ask the Commission and CESR to look at the issue and make recommendations by 31 July 2005. 

In December 2004, the International Organisation of Securities Commissioners (IOSCO) issued a code of conduct intended to guarantee the reliability and independence of CRAs. It takes the view that there will be sufficient market pressure on CRAs to abide by the voluntary code and that further regulation is not necessary.

The Committee of European Securities Regulators (CESR) issued a report in March 2005 in which they considered whether the IOSCO code should be enforced by EU regulation. CESR viewed the oligopolistic nature of the market as a natural part of its function and credibility: investors have confidence in the long-established big names. Regulation would not necessarily increase competition: in fact it could simply erect further barriers to market entry. On balance, CESR concluded that regulation would be costly and of doubtful value; that the IOSCO code provided what was needed and that it would be best to wait and see whether it proved effective.

In the US, the push by the Securities and Exchange Commission (SEC) for further regulatory powers is being challenged by the credit rating industry.  The agencies  insist that their ratings are merely opinions and thus protected by the first amendment. They argue that  the SEC can have no power to take enforcement or punitive action. Chairman of the SEC, William Donaldson, has said that Congress would have to legislate to enable the SEC to have any further oversight powers.