By Lord Foulkes of Cumnock - 3rd October 2011
Lord Foulkes of Cumnock says that the government must engage in "collaborative action" to find a global solution to the destructive impact of credit rating agencies.
Credit rating agencies play a destructive role in the global economy and have been a recurring feature in every major modern crisis – be it the US sub-prime mortgage crisis where they profited from giving dodgy mortgage-backed securities stellar credit ratings, or more recently problems in the eurozone, where they failed to see the crisis coming in Greece, Portugal and Ireland.
Such stunning incompetence prompts serious questions about their ability to do the job and whether they should continue to play such a central role. For too long the oligopoly of Standard & Poor, Moody's and Fitch have been able to wreak havoc among sovereign states and damage growth and jobs; the time has come for parliamentarians to consider alternatives.
The United States, following its recent downgrade, is slowly waking up to this reality. It is taking action to challenge the dominance of the 'big three' and to increase industry competition by recognising other credit rating agencies, as well as legislating (Frank-Dodd Act) to increase the oversight power of the SEC, introducing new fines and penalties, creating greater transparency, and managing any conflict of interest.
The UK government, however, has still to wake up to the political reality. The credit rating agencies represent a narrow range of interests and are plagued by conflict – in many cases with employees serving within the companies they are rating. This is tantamount to corruption. It is time for the UK to take collaborative action and to work with other governments to find a global solution.
Ultimately, we have to move away from this system of credit ratings and encourage investors to consider a broader range of indicators. This is better for the markets, better for consumers and certainly better for governments. All due consideration must be given to ceding such authority to the International Monetary Fund or another, more accountable institution.
Meanwhile measures must be taken to boost competition within the industry and to make the agencies accountable for the ratings they issue. Greater competition, while not easy, would ensure higher quality ratings from which everyone can benefit. In the immediate future, any bold government would refer the case to the EU Competition Commission for an in-depth inquiry into the credit rating industry.
When the Lords return to the House on the 3rd October I will be asking tough questions of the government on collaborative measures we, along with other European governments, can take to address the problem. On this issue I will be seeking an urgent response from Lord Sassoon, the Treasury Spokesman in the Lords.
George Foulkeswas Labour/Co-op MP for South Ayrshire 1979-83 and for Carrick, Cumnock and Doon Valley 1983-2005. He was raised to the peerage in 2005.