The recent Hong Kong Court of Final Appeal (“CFA”) decision in Moody’s Investors Service Hong Kong Limited v Securities and Futures Commission [2018] HKCFA 42 raises very important issues regarding the disciplinary liability of credit rating agencies (“CRA”) in Hong Kong. Credit rating services have been a type of activity regulated by the Securities and Futures Ordinance (Cap 571) (“SFO”) since June 2011 as a result of the 2007-08 global financial crisis. The defendant, Moody’s (the Hong Kong arm of the global credit agency), has been licensed in Hong Kong since the SFO came into effect. In Hong Kong, not only is the business of credit rating itself regulated, but so is an activity related to credit rating. The Moody’s decision is important because it provides useful guidance on when a non-credit rating report will be considered as ‘relating to’ credit rating, clarifying the scope of regulated activities.

In this case, some six weeks after being licensed in June 2011, Moody’s issued a report entitled ‘Red Flags for Emerging-Market Companies: A Focus on China’ and it was described as a ‘Special Comment Report’ (“Report”). This Report is about 25 pages long and contains 20 red flags grouped in five categories: (i) weakness in corporate governance, (ii) riskier and more opaque business models, (iii) fast-growing businesses strategies, (iv) poor quality of earnings or cash flow, and (v) concerns over auditors and quality of financial statements. The Report covers 61 rated Chinese entities. The Report was issued at a time when there was considerable concern as to the accounting and corporate governance standards of mainland Chinese companies. Therefore, not surprisingly, the Report “received extensive local and international media attention”, and it “had a material impact on the market”. The prices of shares fell substantially (well over 10% in some cases) in many of 49 affected companies of the 61 companies discussed in the Report (see [23]).

The Securities and Futures Commission (“SFC”), using its power of disciplinary action under s. 194 of the SFO, found that Moody’s Report was misleading, confusing and inaccurate. Moody’s was fined HK$23 million by the SFC, ultimately reduced to HK$11 million by the Tribunal. Moody’s liability was affirmed on further appeal to the Court of Appeal.

Whilst the Tribunal found that the Report itself was an exercise of credit rating, the Court of Appeal thought that it was not.  As the Report ‘addressed only two elements bearing on credit risk, namely corporate governance and accounting risks, the Report did not come within the definition of “credit rating”, because it could not be regarded as expressing an opinion primarily on creditworthiness of the companies concerned’ (see [31]). Instead, it was an act relating to credit rating. Even so, this related act and hence the Report was still covered by the SFO. In particular, s.193(1)(d) of the SFO defines ‘misconduct’ as:

“an act or omission relating to the carrying on of any regulated activity for which a person is licensed or registered which, in the opinion of the Commission, is or is likely to be prejudicial to the interest of the investing public or to the public interest.” (emphasis added)

The sole issue facing the CFA was whether the Report amounted to an act relating to credit rating activities. The sole judgement was delivered by Lord Neuberger, with whom the other justices agreed. The CFA held that the expression ‘relating to’ is to be accorded its natural wide meaning and the Report was held to be relating to credit rating. Then, the evaluation followed: Did the Report relate to Moody’s credit rating services?

Lord Neuberger concluded that the Report is ‘relating to’ Moody’s credit rating services for a number of reasons. To aid understanding, this article submits that the reasons can be conceptually classified into four categories, namely (1) perception-based, (2) semantic/text-based, (3) substance-based and (4) market reaction foreseeability-based. This four-factor approach is useful for determining whether an activity is ‘relating to’ credit rating.

First, regarding the perception-based reason, Lord Neuberger noted that ‘Moody’s is renowned for providing credit rating services’ and ‘there must at least be a substantial risk that many people in the market will assume that any report emanating from Moody’s, especially if it is concerned with the soundness of the accounting and governance processes and the quality of earnings of specific companies, is in some way related to its credit rating service’ (see [47]). Furthermore, ‘the Report covered 61 Chinese high yielding non-financial companies, all of which were the subject of Moody’s existing published credit ratings. This fact on its own seems to tie in the Report with Moody’s previous credit rating reports on those companies’ (see [48]). It is submitted that this is a perception-based factor, because Lord Neuberger focused on how investors would perceive the Report, as evidenced from the italicized wording (my emphasis). Additionally, it is also noted that Lord Neuberger considered (1) what the ‘obvious message to any remotely acute trader or investor’ was (see [51]) and (2) how one ‘would have thought’ when the Report self-described itself as ‘supplemental’ to the methodological approach used for rating (see [53]). It is submitted that this perception-based factor is relevantly considered, because credit rating and its related activities are intended to be relied upon by the financial market and investors.

Secondly, regarding the semantic-based factor, Lord Neuberger conducted a textual analysis of the actual wording used in the Report. In particular, Lord Neuberger noted that ‘there were frequent references to the credit ratings of the 49 Companies’ of concern out of the 61 companies and used wording like ‘by rating category’, which suggests the connection to rating activities (see [49]). Lord Neuberger also noted that this textual factor alone is not determinative, but is a ‘telling’ factor (see [53]).

Thirdly, Lord Neuberger focused on the substance/nature of the Report. The Report was making comparisons with credit rating (see [50]) and ‘largely concentrated on corporate governance and accounting risks which are but two of the many factors which a credit rating takes into account’ (see [52]). Reading the second and the third factors together suggests that future courts would look at both the form and substance of reports relating to credit ratings.

Fourthly, Lord Neuberger noted that the market reaction was something that should have been foreseen by Moody’s and ‘the only sensible interpretation of the market reaction to the Report is that it was indeed seen as providing a negative sort of qualification to the existing ratings’ (at [54]). The effect of the decision is that CRAs must remain responsible for what they objectively should have foreseen, and must think carefully about the potential consequence of their reports, even if they are not meant to be credit ratings.

Finally, it is noteworthy that Lord Neuberger said there was no ‘clear and convincing disclaimer’. Arguably, the words used by Lord Neuberger indicate that even if there is a disclaimer (and for future drafting purposes), the threshold would be high and it would be difficult to have a ‘convincing’ one (see [48]).


In terms of the impact of this decision on CRAs, Lord Neuberger’s comprehensive approach is clearly geared towards market protection. The four-factor reasoning reveals that not only will a court consider the substance and form as every document analysis normally does, but a court will also look at how a document is perceived and what a CRA should have foreseen. These factors require CRAs to be mindful about and accountable for the impact of their reports. This decision also shows that courts will not allow CRAs to avoid the whole regime of regulation by (1) merely claiming that their reports are not about credit rating, given Lord Neuberger was mindful against ‘playing with words’ (see [53]), or (2) only partially performing certain functions and analysis of a full credit rating exercise (so that it is not classified as a credit rating). Therefore, it is submitted that Lord Neuberger’s broad approach in interpreting ‘relating to’ is welcomed to prevent any evasion of regulation and liability related to credit ratings.

However, it is equally true not all activities are intended by CRAs to be related to credit rating and hence should not be subject to regulation and potential liability. Arguably this is also why Lord Neuberger left open the possibility of having a clear and convincing disclaimer to the concept of ‘relating to’ to be over-inclusive in catching non-credit rating related work.

Whilst it would be extremely difficult to avoid liability by way of a convincing disclaimer if existing rated companies are in concern, CRAs should address the four factors for reports genuinely not intended to be related to credit rating as follows:

  1. it should be expressly said in the beginning of the report that it is neither a credit rating exercise nor related to it at all, and that no reliance should be made for these purposes;
  2. careful wording should be used throughout the report to avoid any linkage with credit rating, and ensure in substance that no part of credit rating methodology is to used; and
  3. in relation to the market reaction foreseeability factor, CRAs should ask themselves whether a report will be seen by the market as qualifying existing ratings.

In conclusion, for the public and market, apart from ensuring better accountability of CRAs over their own work, the guidance from the four factors helps ensure the line between credit rating-related (which is regulated) and non-credit rating related activities (which is not regulated) is clearly demarcated to avoid confusion to the public. For the regulator SFC, the four factors importantly help determine the scope of regulated activities and prevents evasion of regulation. For CRAs, they are helpful in preventing its non-credit rating related work from being regulated when it is genuinely intended not to be related to credit rating.

Martin Kwan is a graduate from the University of Hong Kong.