Liability of Credit Rating Agencies confirmed by Australian Appeal court

The Full Federal Court in Australia has confirmed that, as a matter of Australian common law, a rating agency owes a duty of care to investors in a rated financial product.  The essential basis on which the Full Federal Court reached that conclusion was that the rating agency knew that potential investors in a structured credit product would rely on its opinion as to the creditworthiness of the notes in making their decisions to invest.  As such, the rating agency must exercise reasonable care and skill in the issue of the credit rating.  This Australian litigation is significant more broadly because it remains the only common law example of a rating agency being found liable to investors as a result of ratings which were found to have under-estimated the default risk of products which performed poorly during the financial crisis. What is of particular interest is whether other common law courts would follow the reasoning of the Full Federal Court.  For a more detailed analysis of the lengthy judgment, read our Banking Litigation team's briefing.