Tuesday, 13 February 2018

Article Preview: ‘Scope Ratings: The Viability of a Response’ in European Company Law

Today’s post will preview a recent article by this author that was published by European Company Law, entitled ‘Scope Ratings: The Viability of a Response’ (details here). The short preview will discuss the rationale for the article, some of its aims and achievements, and then the wider picture with respect to the continuing Viability Of articles, with this article representing the fourth in the series.

This article, as mentioned above, represents the fourth edition of the Viability Of series produced by this author, which is a series which aims to examine and assess the growing number of alternatives to the Big Three rating agencies (S&P, Moody’s, and Fitch) that dominate the credit rating marketplace. Details of the first three are available here, here and here (although the titles are different in these last two articles, they are still in the same series) and this current article operates on exactly the same lines. The rationale for these articles is straightforward; the proposed challengers to the hegemony of the Big Three need to be assessed, discussed, and judged within a practical light because, given the nature of this industry, even those with good intentions will likely meet an obstacle they could not have foreseen, or at the least anticipated – the Big Three are well known, but their practices are inherent, as in any oligopoly, and the effect of that is felt within every challenger to their position.

This edition of the series focuses upon Scope Ratings, a German rating agency that is taking a different approach to all the other challengers. The agency is aiming to become a ‘European alternative to the “status quo” for institutional investors’, as well as international investors, and to achieve that aim they are embarking upon a concerted and far-reaching Mergers & Acquisitions strategy that has the potential to provide a real foundation to their development, but is also fraught with great risk within the oligopolistic dynamic that exists within the industry. Starting life in 2002, the firm has gone on to acquire a number of financial service providers from within the E.U. in an effort to consolidate expertise that, at least, allows for investors to consider different options other than what the Big Three provide. A big breakthrough occurred for the firm’s strategy when, in 2011, the firm was officially registered by the European Securities and Markets Authority (ESMA) as a functioning and accredited rating agency; the firm has continued its aggressive M&A strategy ever since, and now counts major companies like BMW, Santander, and UBS as its clients. The article goes on to examine the firm’s recent acquisition (2016) of Feri rating services, and discusses how the acquisition has the ability to increase Scope’s fortunes on account of its new found ability to incorporate significant sovereign bond research into its offerings. Yet, the firm sees an important part of its development within the banking sector, and as such has recently moved to open a London branch headed by a former head of department at Moody’s; how these developments will unfold in the wake of the U.K’s decision to leave the European Union is another matter entirely (a point which is raised in another article that has just been published by this author with the assistance of the European Business Law Review – preview available here).

In terms of setting the structure for the article, it proceeds by counteracting the analysis of the ‘challenger’ with that of the ‘champion’ i.e. the Big Three, in order to demonstrate the task facing Scope Ratings. Upon doing so (it is not worth going into detail here; regular readers will know the views on the Big Three held by this author), the article concludes the ‘champion’ section by discussing the E.U.’s plans to ‘increase competition’ in the marketplace by way of inducing the newer firms further into the investing picture (this point was raised in a recent article published by this author with the assistance of European Company Law – preview available here); the overriding statistic that comes from this analysis is that, at the moment, Scope holds just 0.39% of the market, which makes its progress interesting but not threatening to the Big Three at the moment. However, as the article continues by looking at the ‘tale of the tape’, which aims to examine the reasons why Scope may not make an impact, and the reasons why it may. The concluding section suggests that 0.39% is simply not a factor in the current market, meaning that Scope’s ratings offer an addendum at best to the ratings of the Big Three. Also, if it does grow beyond 0.39%, the likelihood is, at least according to historical trends, that the Big Three will devour the agency and simultaneously protect their oligopoly, as any good oligopoly must. Yet, the article does offer reasons for why Scope may gain more success in the field, and that is mainly due to the structural differences being proposed by the E.U. In the American market, any claims of increasing competition within the rating industry is often nothing more than lip service (as Egan-Jones can attest to), but in the E.U. the sentiment is much stronger; this may be because of the effect of the sovereign debt crisis that saw the agencies at the heart of the unfolding crisis, or just because the U.S.-based agencies have less of an influence in the E.U. to some relative extent. Nevertheless, there is a growing sentiment, whether misplaced or not, to enforce competition on the sector, and that can only go in Scope’s favour. Additionally, Scope is particularly European in its outlook, and that bodes well if the E.U. decides to incorporate protectionist ideals into its regulatory framework moving forward. Also, the specialised nature of Scope’s offerings has drawn in some highly reputable clients, with the hopeful impact being that more will decide to incorporate Scope Ratings’ evaluations in their investment decisions. However, a pragmatic evaluation can only have one outcome: at the moment, Scope is minute compared to the Big Three, and perhaps the only reason why the oligopoly is allowing the small firm to grow is because, at the moment, they need not concern themselves with Scope’s development (one can safely assume they are monitoring their progress, however).

The effect of this article is to present yet another account of the incredible dynamics that exists within this, and a number of other financial service sectors (the same could be said of the auditing field, for example). The presence of the oligopoly outweighs any smaller undertakings, and regulatory intervention, and any political movement against its position, which is why the study of oligopolies and their dynamics is of the utmost importance (see here for a good resource on the matter). By continuing the study of the rating agencies and basing it upon the actualities of the rating agencies themselves, which is something this author calls for in every piece, rather than what one may desire them to be, or what they should be doing theoretically, there stands a chance at affectual change; other than that, we can expect the continuation of a process that sees these private firms entrenched within society without any impactful recourse.

Keywords: Credit Rating Agencies, Scope Ratings, Big Three, E.U., Business, Politics, Law, @finregmatters.

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