Making credit rating agencies accountable: Is estoppel a possible solution?

Credit rating agencies (CRAs) have become the arbiters of financial markets. There is a strong argument to the effect that they have become too powerful, particularly in the context of the ongoing financial crisis where they seem to have power without responsibility. This paper sets out tentative suggestions for reforming the present regulatory framework by making CRAs liable for issuing inaccurate ratings. The analysis starts out by mapping the contours of the legal aspects of the ratings market before going on to address the major questions regarding CRAs’ modus operandi. The fact is that credit ratings affect market confidence and influence both investment decisions and expectations. For this reason, CRAs are capable of bringing about potential distortions in the financial sector. There has been much scholarly debate about the need for a civil liability regime for CRAs and whether such a scheme would be feasible. A civil liability regime for CRAs could constitute a system of investor protection over and above classic regulation. In this context, this paper considers whether the doctrine of estoppel might not be a feasible way of making CRAs accountable. Although a conclusive finding cannot be made, it is possible that the implementation of an effective liability regime through estoppel, could be a valid option for holding CRAs responsible.