Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Hansard source

Thank you, Senator Brown, for that important question. The issue of the role of credit rating agencies and research houses is an important one. In order to identify the importance of the issues around credit rating agencies and their assessment of financial risk—and I have commented to some degree about this on previous occasions both here and publicly—I would outline it in this context: firstly, the base cause of the US subprime financial crisis, as the community has come to know of it, was the distribution of unfettered and unregulated mortgage products to millions of Americans who on any reasonable basis could not have afforded to continue the repayments, particularly when they came off the introductory, or what is known as the honeymoon, offer. Unfortunately, millions of Americans were told anything to sell them the mortgage. The products were then bundled together into securitised instruments and passed through the financial system. Unfortunately, a key element of regulatory oversight and failure was the credit-rating agencies’ assessment of the level of risk of these particular bundled securitised financial products. The assessment was AAA, which basically meant that they could not fail or if they were going to drop in value then it would be a very small drop in value. Of course, what happened, we know, was that these layered securitised instruments collapsed in value. So the assessments made by the credit-rating agencies were fundamentally wrong. This of course was a serious failure in regulatory oversight that occurred in the United States—amongst a number of other failures.

IOSCO is the international credit organisation that ASIC, our regulator, is actively involved with. The failure of credit-rating agencies and the range of issues within the workings of credit-rating agencies were identified by IOSCO as requiring a fundamental examination and reassessment. I was pleased to personally meet Mr Greg Tanzer, who is in fact an Australian who heads up IOSCO. I had a lengthy discussion with him—I think it was in March this year—about the issues around credit-rating agencies and the role they played in failing to identify and assess the risk properly in respect of these instruments in the United States.

There are a number of issues that have been under examination in respect of the role of credit-rating agencies. Credit-rating agencies do have a conflict of interest because they are paid by the provider, usually, to carry out the assessment. That is an obvious conflict of interest and you have rightly raised it, Senator Brown. If the provider pays the agency for an analysis, there would on occasions be a temptation for the organisation conducting the analysis—in this case a credit-rating agency—to perhaps not be as diligent as it should have been. That was certainly identified as an issue in the United States.

So there are issues around conflict and the role in which the assessment is carried out, whether it is carried out diligently and correctly with the proper assessment of the risk in the totality—not the risk around the financial instrument but in this case the risk around the distribution of the products and who they were sold to at a retail level. When you go back and carry out a fundamental reassessment of the risk if market conditions change—market conditions change in respect of the value of your property so there should have been a fundamental reassessment of the risk that did not occur— (Time expired)