Standard & Poor’s president Deven Sharma, who has recently overseen the internal restructuring of the credit agency and data vendor into two separate businesses, has indicated that next month he will be handing over his responsibilities to Douglas Peterson, who is currently chief operating officer of Citibank. Sharma will stay on in an advisory capacity until the end of the year, but the firm indicates that it has been searching for his successor since the splitting of the business into two in November last year.
The ratings agency business is facing the onslaught of regulation and the firm is no doubt hoping that Peterson’s experiences at the helm of a bank will stand him in good stead in dealing with this higher level of scrutiny. However, he’s joining S&P at a time of great pressure, as the ratings giant faces investigation by the US Department of Justice regarding its conduct during the recent controversial downgrade of US long term debt from its AAA rating this month.
Serious concerns have been raised within the regulatory community and the industry at large about the independence of these ratings agencies and potential inbuilt conflicts of interest within the ratings process. Ann Gittleman, director of Forensic and Dispute Advisory Services Group at financial advisory firm Kinetic Partners, explains: “There is a fundamental flaw in the framework for US credit rating agencies to stay independent. Who is there to look over their shoulder and ensure that they are rating debt instruments properly?”
In fact, this week, the former senior president at S&P rival Moody’s William Harrington has publically stated that ratings agencies often suffer from a conflict of interest because of the way in which they receive funding. Senior management are therefore given an incentive to interfere with analysts’ independent assessments and Harrington referred to a culture of “intimidation and harassment” at his former employer to this end.
It is this and many other criticisms that have been levelled at the ratings agencies that has compelled the Securities and Exchange Commission (SEC) and other regulators to propose new data transparency requirements and governance restrictions.
Gittleman points to a “similar flaw” of a lack of transparency in the accounting industry that surfaced during the Enron scandal and caused a revamp of the regulation of that corner of the financial services industry. Audit firms were forced to sell off their consulting practices, an oversight body was empowered and peer reviews were mandated. “The same changes should be put in place for rating agencies to ensure they are acting independent in their duties, especially since an investor does not have a private cause of action against them,” she contends.
Although regulators may stop short of making ratings agencies liable for inaccuracies in the long run (some corners of the community are particularly keen to see this happen), there are certainly big changes ahead for the sector and this investigation could result in further action being taken. “One of the things that we expect to see addressed in this probe by the US Department of Justice is how the independence of ratings agencies can be systemically improved and reviewed moving forward to avoid situations such as this,” says Gittleman.
For his part, Sharma has had a difficult time as president of the ratings business since his appointment to the role in 2007. One can imagine he’s looking for something a little less stressful from his next appointment.
As for the other side of the business, the rebranding process for the data business that sits under the McGraw Hill Financial banner (for now at least) has been underway over the course of this year and Lou Eccleston was officially appointed as head of this business earlier this year. The hope is that having all of the previously rather disparate data and analytics solutions under one brand and one divisional head – Eccleston was previously in charge of the fixed income risk management and valuations solutions but has now taken ownership of all the data and analytics products – should allow for a much more joined up approach to the sector overall.
The S&P Valuation & Risk Strategies (VRS) brand remains intact for these services and the firm indicates that McGraw Hill Financial is more of an internal moniker than anything else. As part of the restructuring, Peter Jones, who was and remains a senior director of VRS, has also recently been appointed global head of data enterprise.
The vendor is currently planning the launch of a new VRS offering in September aimed at the buy side, which Reference Data Review will provide comprehensive coverage of at the time of its launch.