CMRK’s Comments and Recommendation on the Regulatory Impact Assessment (RIA) and Capital Markets (Credit Rating Agencies) Regulation,2022

As a player in the Kenyan Capital Markets, we would first like to commend the Capital Markets Authority (‘Authority’) on its commitment to improve the markets by introducing the updated draft regulations. We believe that improving the regulatory environment is one of the main ways to foster the growth of Capital Markets, promote investor protection and improve investor confidence through a transparent and efficient capital market. To this end, we have analyzed the RIA statement and the Capital Markets (Credit Rating Agencies) regulations and have identified Key positives and areas of improvement.

  1. Key Positives
  • Preparation of the Regulatory Impact Assessment (RIA) Statement – We commend the Authority for preparing a RIA statement to assess the impact of the regulations on the related business. As an association, we believe that RIA is important as it helps in identifying the problems with the current regulations and provide alternative solutions to the identified problems. We agree with the Authority’s that there is need to enhance credit rating requirements so as to make them more facilitative.
  • Prohibition of CRAs from carrying out any other activity other than rating (Reg 10) – Restricting the activities of CRAs will reduce the possibility of conflict of interest between the issuer and the rating agency, especially when the agency offers other consulting and advisory services to the issuer as the issuer may be coerced to purchase the service in return for improved rating. This will be in line with the IOSCO Code on Credit rating which states that the rating of an issuer or security by CRAs should not be affected by the existence or non-existence of relationship with CRA

2. Areas of Improvement

NoRegulationsAreas of improvementConceptual Issues/Further commentsRecommendation
1Regulation 14(2)If a client does not cooperate with the rating agency so as to enable the credit rating agency to comply with the obligations under this regulations, the rating agency shall carry out the review on the basis of the best available information or in the manner as specified by Authority from time to timeThe authority specifying the manner of review by the CRA interferes with CRAs independence. Allowing this regulation to remain as it is will create a juxtaposition for the CRAs as it is not in line with the IOSCO Code on credit rating. Instead, the authority should ensure that CRAs comply with Reg 16 of disclosure of ratings and rationale  The regulation should read, “If a client does not cooperate with the rating agency so as to enable the credit rating agency to comply with the obligations under this regulations, the rating agency shall carry out the review on the basis of the best available information”

3. Conceptual Issues

  • What should be the adequate level of regulatory oversight of CRAs to ensure greater reliability for the rating? Currently, there are only 5 CRAs operating in Kenya and to improve on the quality of Credit rating, we need to increase the level of competition in the country. Lack of competition in the industry will lead to inflated prices, plain vanilla innovations, low quality rating and conflict of interest. It is not clear whether the new regulations will increase or decrease the barrier to entry into the rating industry and expansions by foreign and local companies
  • The benefits of this regulations seems one sided as the impact towards Credit rating agencies is minimal as compared to issuers and investors. The regulations are more of restrictive nature which is against Capital Markets Act 11(1)(a) which states “The principle objective of the Authority is the development of all aspects of the capital markets with particular emphasis on the removal of the impediments to, and the creation of incentives for longer term investments in, productive enterprise”
  • Can a CRA outsource the service of another CRA? If yes, what are the procedures and requirements for outsourcing? Will the CRA need approval from the authority? The regulation can borrow this from the South African “Credit Rating Services Act, 2012”, Reg 12(1) which state “A registered Credit rating agency may not, without prior written approval of the Authority, outsource any of its operational function, save for outsourcing to an entity in the same group as the registered credit rating agency”
  • Can a registered CRA be suspended or have its registration cancelled? What are the conditions for the Authority to suspend or cancel the registration? What will happen to the credit rating issued by the suspended CRA? This provision has been excluded yet it is included in the other capital markets regulations. As the credit rating industry grows, there will be need to have other penalties for CRAs apart from Penalty fees, in case the CRAs are not compliant.
  • There should be an “Independence clause” in this regulations. No person, including the authority, may hinder, interfere with, obstruct or improperly attempt to influence a credit rating, content of a credit rating or any methodology, model or key assumptions used by the registered CRA to derive the credit rating. This will ensure that our registered CRAs are in line with the IOSCO principle of credit rating of Independence and conflicts of interest”

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