Credit Rating Agencies Partially Responsible for Financial Crisis, say MEPs

Strict rules to improve transparency and independence of European credit rating were endorsed by the European Parliament when MEPs adopted a legislative report with 569 votes in favour, 47 against and four abstentions.

According to Members, credit rating agencies (CRAs) failed to detect the worsening of the financial market conditions and to adapt their ratings in time. They also failed to adapt to the new risks of the credit market, e.g. structured credit products (derivatives) and hedge funds.

The new legislation sets up an obligation for all CRAs wishing to operate in the EU to register and comply with a set of rules. The approved provisions aim at enhancing transparency, independence and good governance of credit rating agencies, thus improving the quality and reliability of credit ratings and consumer’s trust.

The main objectives of the regulation are to:

• Ensure that credit rating agencies avoid conflicts of interest.
• Increase transparency by setting disclosure obligations.
• Ensure an efficient registration and supervision framework at EU level.
• Improve the quality of the methodologies and the quality of ratings.

Under the proposed regulation, each CRA would have to disclose to the public the methodologies used to adopt their ratings. The company would also need to ensure that the issued ratings are based on all available information. It would also adopt all necessary measures to ensure all used information is of sufficient quality and from reliable sources.

The compromise reached provides for a greater role for the Committee of European Securities Regulators (CESR), which will be in charge of registering CRAs’ according to the new rules. This would provide a single point of entry for the submission of applications and thus cost reduction for agencies. CESR should receive applications for registration and inform competent authorities in all Member States. CESR will also make this information available to the public.

The regulation will be directly applicable in the whole EU 20 days following its publication in the Official Journal. Member States will have six months to take the necessary measures to implement the new provisions. As an exception, the provisions on the use of ratings from non-EU agencies, this transition period will last 18 months. Three years later, the Commission will evaluate the effectiveness of the regulation, including the reliance on credit ratings in the EU.

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