Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

My question is to the Minister for Superannuation and Corporate Law, Senator Sherry. The role played by credit rating agencies has been roundly criticised for giving favourable, undeserved and reckless ratings to the US subprime residential mortgage backed securities and other so-called structured financial services which ultimately led to the global financial crisis, which has done untold damage to markets and to individuals around the world. Professor John Quiggin from the University of Queensland has recently stated:

… much of the blame for the survival of these agencies must rest with governments, which have enshrined agency ratings in official investment guidelines, effectively outsourcing the crucial public role of prudential regulation.

I note that on 22 May last year the government announced a review of the regulatory regime of credit rating agencies in Australia. Can the minister advise what progress has been made in this review and the time frame for any proposed reforms?

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

I think I got all that, and it is a very good question. This is an important issue. The performance of credit rating agencies has been observed and analysed in the context of the world financial and now economic crisis. It was identified as one of the key failings that led to the financial crisis, the so-called subprime crisis, in the United States. The unquestioning use of the ratings by credit rating agencies, the over-reliance on them by users, was a major contributing factor. It is completely unacceptable to have a systemically important set of entities such as credit rating agencies that operate in Australia—and, indeed, in most countries of the world—being without any oversight whatsoever. They are outside our regulatory system. They are regulated—to the extent they are—by the United States. Of course, this is of deep concern, given what has occurred.

On 13 November last year I announced our decision to bring credit rating agencies under federal Australian regulation for the first time. There was a review and—before we have criticism of reviews—the review was expeditious; it was an important area. The review has concluded and action has been announced. For the first time all rating agencies in Australia will require a licence, but we have not stopped there. They will also be required to issue an annual compliance report based on how they have conformed with what are now tough global sets of minimum rules on issues such as conflicts of interest management. Australia is well ahead of most other countries in this regard. I’m getting another two minutes? Australia is well ahead—

John Hogg (President) Share this | Link to this | Hansard source

Thank you, Senator Sherry, your time has expired. It was such a riveting answer I was captivated by it!

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

Mr President, I ask a supplementary question. Can the minister outline the time frame for such reforms? What does he say of Standard and Poor’s criticism earlier this month that there will be ‘conflicting rules’ if only one country regulates in the absence of some uniform regulations so that these rating agencies can be held to account?

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

I did not have notice of this question but I am pleased to respond. Frankly, my response to Standard and Poor’s response about the tough new licensing regulations that we are introducing is: tough. Frankly, the performance of credit rating agencies in the context of the US financial crisis was a disgrace and they contributed to the appalling events in the financial system and the economic system—not just in the US but in Europe—that we are all paying the consequence of. It is about time that, where we have important institutions that are making critical assessments of the financial worthiness of particularly exotic and complex financial products, they do it properly—and credit rating agencies did not do it properly. We are going to license them in Australia. We are going to require a compliance report. (Time expired)

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

Mr President, I ask a further supplementary question. Given that the credit rating agencies are routinely used to rate the financial status of governments in Australia, is the government considering a different independent credit rating regime?

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

Thank you again for the supplementary question. Our approach has been to ensure that the approach of credit rating agencies in Australia is rigorous and underpinned by proper analysis and that conflicts of interest are identified. Whether the credit rating agencies are supplying a rating of governments or of private institutions that rely on this information, particularly the public, the investors, need to have confidence in the rating.

Our approach has been to license these rating agencies. The independent regulator, ASIC, are finalising the reporting requirements but, as I have already indicated, they will be required to give a compliance report. It will be internationally coordinated. The international supervisory body, IOSCO, based in Spain, have come up with some minimum standards and it will be checked periodically by the regulator for its validity. (Time expired)