FSA says Investors relied too much on credit ratings

LONDON (Reuters) - The financial watchdog told legislators that banks were not "reckless" in the run-up to the credit crisis, but warned some investors had relied too heavily on ratings agencies.

Credit ratings agencies have come under fire in recent months, accused of being too slow in warning about problems in the U.S. subprime mortgage sector and possible repercussions.

However, in a wide-ranging evidence session before parliament's Treasury Committee on Tuesday, the Financial Services Authority's (FSA) top executives said some institutional investors simply failed to do enough of their own research.

"One element of the problem is institutional investors using rating agencies as a shorthand way of measuring liquidity as well as credit (risk)," FSA Chief Executive Hector Sants said, in the watchdog's second appearance before legislators in two months. "It is vitally important that people understand the limitations of the service that a credit agency delivers."

The instruments, he said, were transparent enough for those who had the "time and expertise" to unpick them.

"People have relied too heavily on the rating agencies rather than doing their own (research)," Callum McCarthy, the FSA's chairman, told the committee.

In a separate hearing last week, leading investment banks acknowledged that some investors in complex structured products were not sophisticated enough to understand what they bought.

Answering questions on Northern Rock, the country's highest-profile casualty in the credit crisis, the FSA confirmed it still expects a trading update from the battered lender this month and dismissed calls to suspend the bank's volatile shares.

The stock was down 5.5 percent in late trade on Tuesday.