A Red Flag for Hong Kong Credit Ratings

Abstract

In July 2011 Moody’s Investors Service Hong Kong issued a report that used a system of red flags to highlight corporate governance and accounting risks in a specified population of listed companies. Although Moody’s did not consider the report a credit rating, the Securities and Futures Commission, and the Securities and Futures Appeals Tribunal in its March 2016 determination, regarded the issuance of it as part of Moody’s regulated activity as a provider of credit rating services. As such, Moody’s was held subject to regulatory codes of conduct it was said to have breached, and was consequently disciplined. Moody’s has since appealed that determination, which will bring the case before the Court of Appeal.

This paper undertakes a detailed legal analysis of the Tribunal’s determination. It suggests the Tribunal’s purposive approach to legislative interpretation is flawed, and its determination impaired by the way the Tribunal has framed the syntax of its reasoning and has conflated important distinctions between credit risk, creditworthiness, credit ratings and the methodology used to produce a rating opinion. Other legislative provisions relevant to the publication of information are reviewed and it is noted there is no lacuna in Hong Kong’s law that would necessitate the approach taken by the Tribunal to address the perceived wrongdoing. Whether the Tribunal’s interpretation of the law is necessary or consistent with the policy intent of the Legislature is queried.

The ramifications of a Court of law upholding the Tribunal’s determination are considered. Locally this includes blurring the perimeter around regulated and unregulated activities and the possible creation of an uneven playing field. Of particular significance for Hong Kong’s credit rating industry, it may create uncertainties as to whether Hong Kong would remain an equivalent jurisdiction for the purposes of recognition under European Union regulations. The paper concludes with a brief consideration of the regulatory approach to managing the introduction of a new regulatory regime.