Credit ratings go transparent

The president of Standard and Poor's has today outlined the changes S&P will be making to restore confidence in credit ratings.

Transparency will be a key theme for financial services for the foreseeable future and S&P are responding to this by providing much more detailed information about the assumptions, stress tests and scenario analysis underpinning their ratings.

About time too.

Fund managers will find it easier to understand the ratings in the light of their own assumptions, peer review will be richer and marketers will be able to better communicate the risks involved in complex products.

However, we must remember that a demand for transparency is just another way of saying that trust and confidence has disappeared. This additional data is a really way of meeting the first two of the conditions for trust I discussed in yesterday's post - keeping promises and acting competently.

Although institutional investors may find some of the information transparency demands useful, realistically much of it is already available to them in one form or another. As for retail clients - their classification means that we have to assume the data is of no practical value to them - after all, we have the same duty of care to explain the underlying risks and ensure suitability as we ever had.

The way this information is presented is therefore potentially as important as what it says. When we incorporate it into marketing collateral, we need to remember that a major role is to communicate the underlying competence and reliability of our institutions - to the people that can't critique it as much as to those who can. After all, that's one of the reasons S&P is providing it in the first place.