Centre for Economic Policy Research

4.7.3
Provide for greater transparency
Transparency is also a tool of market discipline. In general, therefore, we favour
the maximum degree of transparency, subject to one caveat. If an economic agent
is required to be transparent about proprietary information, their incentive to
generate such information may be reduced. Insofar as rating agencies produce
information or analysis that could not profitably be produced if it was required to
be made public, then we believe there is a case for protecting the confidentiality
of that information.
Still, this leaves a wide range of information that we believe could usefully be
disclosed, which would help users of ratings judge the potential for conflicts. This
would include any relationships between the rating agency (or its employees) and
the rated entity; the fees paid; whether a rating was solicited or unsolicited; 
Rating Agencies: Conflicts of Interest in Credit Assessment and Consulting 51

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compensation structures within individual firms; and any adjustments to 
provisional ratings made after consultation with representatives of the rated 
entity. 
A particularly important area, in our view, is that of the sale of advice. Where
a rating agency provides advice on how to structure a financial contract in order
to achieve a given rating, and then provides the relevant rating, the potential 
conflict risks become overwhelming. This does not necessarily presume any lack
of diligence or goodwill on the part of the agency concerned: it may simply be
that it believes, erroneously, that its credit assessment method is superior to 
others. We believe that all ratings of issues for which the rating agency has 
provided prior advice on financial structure should be clearly signalled. 
4.7.4
Develop codes of conduct
As already noted, the credit-rating agencies are fully aware that doubts could
emerge concerning the objectivity of their credit assessments, given the principal
source of their revenues. To allay these concerns, all of them have instituted 
procedures designed to insulate credit analysis from undue pressures. To take
Moody’s as an example, these include: avoidance of commercial relations with
any entity rated by the firm; the absence of forbearance out of concern for the
consequences of publishing a rating; procedures to avoid conflicts of interest; the
proper use of confidential information; and procedures to ensure that rating 
decisions reflect full and deliberate consideration (McDaniel, 2003). Is this 
sufficient?
In view of public concerns about potential conflicts of interest, we see 
advantages in taking this process further, and for the agencies to develop a 
comprehensive and uniform document codifying their practices. The agencies
themselves seem to be willing to move in this direction: ‘We are not opposed to
a further consolidation of our policies and procedures into a single public 
document, such as a Code of Conduct. Nor are we opposed to oversight that can
confirm that these policies are being followed’ (McDaniel, 2003).
While we have some doubts about how far official oversight could 
appropriately go in providing continuous supervision of the industry, we think it
could be helpful for the principal market regulator in each jurisdiction to give its
opinion on the suitability of an industry-developed code of conduct and possibly
help in its construction.