Ratings have limitations

13 June 2013
| By Staff |
image
image
expand image

Financial advisers need to be aware of the limitations of the ratings provided by ratings houses, according to specialist financial services lawyer Peter Townsend.

Townsend, the principal of Townsends Business and Corporate Lawyers, said that if ratings were discussed it was vital the adviser made the client fully aware of what the ratings actually meant and how they could be used in assessing a product.

Advisers who want to use ratings to sell product must explain to the client the limitations of those ratings, Townsend warned.

"To do otherwise is to run a material risk of failing to fully meet the adviser's duty to the client," he said.

He referenced court findings with respect to action by Wingecarribee Shire Council against Lehman Brothers Australia and the use of product ratings.

Wingecarribee Shire Council lost a substantial amount of money by investing in so-called Synthetic Collateralised Debt Obligations (SCDOs), and it and many other councils took a class action against their adviser, Grange Securities, which had been taken over by Lehman Brothers Australia.

Lehman argued that the major ratings agencies (Standard & Poors, Fitch, and Moody's) had given the SCDOs high ratings and should have be proportionately liable for the councils' losses.

The argument ran that the ratings were effectively a representation that the SCDOs were equivalent, as regards risk profile, to other types of financial products carrying the same rating from the same ratings agency.

"The court would have none of it," Townsend said. "It held that the ratings did not convey that message. Rather it was how the adviser used the ratings that was the real concern.

"In this case Grange used the ratings to suggest that the products with similar ratings had similar risk profiles," Townsend said.

"Grange did not put the ratings, and the use to which they could be put, into context or explain to the client the limitations of the ratings in respect of identifying material risks of the product or its risk profile."

Read more about:

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

GG

So shareholders lose a dividend plus have seen the erosion of value. Qantas decides to clawback remuneration from Alan ...

2 months 1 week ago
Denise Baker

This is why I left my last position. There was no interest in giving the client quality time, it was all about bumping ...

2 months 1 week ago
gonski

So the Hayne Royal Commission has left us with this. What a sad day for the financial planning industry. Clearly most ...

2 months 1 week ago

A Sydney-based financial adviser has been banned from providing financial services in the interest of consumer protection after failing to act on conduct concerns. ...

3 weeks 2 days ago

ASIC has cancelled the AFSL of a $250 million Sydney fund manager, one of two AFSL cancellations announced by the corporate regulator....

3 weeks ago

Having divested its advice business in August, AMP is undergoing restructuring in at least four other departments amid a cost simplification program....

2 weeks 3 days ago