Credit Rating Agencies to be Regulated by the MAS

Transcription

1 Credit Rating Agencies to be Regulated by the MAS The Monetary Authority of Singapore ( MAS ) has made the business of providing of credit rating services a regulated activity under the Securities and Futures Act ( SFA ) with effect from 17 January Credit rating agencies carrying on business in Singapore will consequently have to be licensed under the Capital Markets Services ( CMS ) licensing regime under the SFA. Existing credit rating agencies have a period of six months from 17 January 2012 to apply for a CMS licence. With the implementation of the new regulatory regime, credit rating agencies will be required to comply with licensing obligations, including existing regulations, guidelines, and notices under the SFA that apply to all CMS licensees. They will also be required to comply with a new Code of Conduct for Credit Rating Agencies ( CRA Code ). The new regulatory framework and CRA Code were the subject of a public consultation in March 2011 (please see our update, MAS Proposes to Regulate Credit Rating Agencies for more information). Most of the proposals contained in the Consultation Paper on Proposed Regulation of Credit Rating Agencies ( Consultation Paper ) have been adopted in the finalised framework and CRA Code. Accordingly, this update will focus primarily on the changes made pursuant to the feedback to the public consultation. Overview of the Regulatory Framework Licensing Requirements for Credit Rating Agencies Requirement for CMS licence As noted above, a person that carries on the business of providing credit rating services in Singapore will need to hold a CMS licence. Providing credit rating services is defined as preparing credit ratings in relation to activities in the securities and futures industry for dissemination or distribution by subscription. Territorial exclusions The preparation of the credit ratings which is carried out either wholly or partly in Singapore for dissemination or distribution in Singapore or elsewhere would give rise to an obligation to obtain a CMS licence. However, the Securities and Futures (Licensing and Conduct of W ongpar tnership LLP (U EN : T08LL0003B) i s a l i mited liability law partnership registered in Singapore under the Limited Li abi l i ty Par tner shi ps Act (Chapter 1 63A).

2 Business) (Amendment) Regulations 2012 makes it clear that the preparation of credit ratings wholly outside Singapore is not caught. In order to reduce the risk of credit ratings of unregulated credit rating agencies from being misused, the MAS has stated in its Response to Feedback Received Consultation on Proposed Regulation of Credit Rating Agencies ( Response ) that it is considering requiring financial advisers and issuers to disclose to investors the regulatory status and jurisdiction of the credit rating agencies whom they are relying on to market their financial products. Activities excluded Certain activities have been excluded from the definition. These are as follows: Preparing a private credit rating pursuant to an individual order which is intended to be provided exclusively to the person who placed the order and not intended for public disclosure, or distribution by subscription; and Preparing credit scores, credit scoring systems or similar assessments related to obligations arising from consumer, commercial, or industrial relationships. This essentially ensures that credit bureaus and other such agencies will not be caught under this regime. Licensing Requirements for Representatives of Credit Rating Agencies Registration under the RNF As with other holders of CMS licences, representatives of a licensed credit rating agency will also need to be licensed. They must also be appointed and registered under the Representative Notification Framework ( RNF ). In response to queries as to which employees of a credit rating agency would need to be licensed, the MAS has explained (in its FAQ on Credit Rating Agencies ) that any person who engages in any one or more of the following activities at least partly within Singapore will be required to be registered under the RNF: Analysing information or data referred to or used in preparing the credit rating or a revision to a credit rating; Formulating or drafting an opinion on the creditworthiness of a - 2 -

3 rating target, or a revision to an opinion on the creditworthiness of a rating target which is the subject of a credit rating which has been issued; Evaluating or approving a credit rating or a revision to a credit rating; Monitoring or reviewing a credit rating which has been issued; Formulating or drafting credit rating methodologies or models, or a revision to such methodologies or models; and Evaluating or approving credit rating methodologies or models, or a revision to such methodologies or models. Criteria to obtain a licence To be licensed, representatives will need to fulfil MAS s fit and proper criteria. A representative will also need to hold at the minimum a Bachelor s degree in a discipline that is relevant to him acting as a representative of his principal in respect of providing credit rating services, as determined by his principal. Existing representatives as at 17 January 2012 are exempted from this requirement. There is no requirement that representatives of credit rating agencies pass the Capital Markets and Financial Advisory Services examinations. The Code of Conduct for Credit Rating Agencies Disclosures by affiliates not required As noted above, the finalised CRA Code is largely the same as that proposed in the Consultation Paper, and has been adapted from the standards set by the International Organization of Securities Commissions (IOSCO). The main substantive changes are as follows: A credit rating agency should refrain from assigning a rating, and should ensure that any existing rating is withdrawn, if it does not have sufficient quality information to support a credible rating. A credit rating agency should review at least once a year its independent compliance function. While the Consultation Paper had required a credit rating agency to publicly disclose whether it or any of its affiliates receives five percent or more of its annual revenue from a single issuer, originator, arranger, client or subscriber, of securities, the finalised CRA Code only requires the credit rating agency to make this disclosure. Accordingly, affiliates of a credit rating agency will not be required to so disclose such information

4 Publish information on how ratings are arrived at Representatives of credit rating agencies who are directly involved in credit rating activities may not initiate, or participate in, discussions regarding fees or payments with any rated entity. The finalised CRA Code also makes it clear that this prohibition extends to discussions with a related third party or any person directly or indirectly linked to the rated entity by control. Credit ratings, or decisions to discontinue a credit rating, must be disclosed in a timely manner. The CRA Code states that a credit rating agency should ensure that sufficiently clear and easily comprehensible information is published about its methodologies, models, key rating assumptions, and significant practices, procedures, and processes (including financial statement adjustments that deviate materially from those contained in the issuer s published financial statements and a description of the rating committee process, if applicable) used in carrying out its credit rating activities. The information should also include the meaning of each rating category and the definition of default or recovery, and the time horizon used when making a rating decision A credit rating agency should publicly disclose annually its legal structure, its ownership, and financial information about its revenue. The proposal to require a credit rating agency to disclose its quality control system has been removed. Enforcement via licensing framework Compliance with the CRA Code will be enforced through the licensing framework, and the MAS will take this into account in granting or cancelling a credit rating agency s CMS licence. In addition, when applying to provide credit rating services, an applicant will be required to provide a description of how it will observe the CRA Code, and confirm that it, its employees, and its appointed representatives are and will continue to be in observance of the CRA Code

5 If y ou would like information on this or any other area of law, you may wish to contact the partner at WongPartnership that y ou normally deal with or contact any of the following partners: HUI CHOON Y UEN Head Capital Markets Practice; Joint Head Financial Services Regulatory Practice DID: choonyuen.hui@wongpartnership.com ELA INE CHAN Joint Head Financial Services Regulatory Practice DID: elaine.chan@wongpartnership.com Website: Sin gapore Financial Services / Corporate / Intellectual Property One George Street #20-01 Singapore Tel: Fax: Litigation & Dispute Resolution / Tax 63 Market Street #02-01 Singapore Tel: Fax: Ch ina Beijing Representative Office Unit 3111 China World Office 2 1 Jianguomenwai Avenue, Chaoyang District Beijing , PRC Tel: Fax: Shanghai Representative Office Unit 5006 Raffles City Office Tower 268 Xizang Road Central Shanghai , PRC Tel: Fax: Middle East A bu Dhabi Branch A l Bateen Towers Bu ilding C3 Office (P1) P.O. Box N o A bu Dhabi, UAE Tel: Fax: Licensed by the QFCA Office A mwal Tower, West Bay P.O. Box N o Doha, Qatar Tel: Fax: