European Parliament MEPs Agree Proposals for Credit Ratings Agency Regulation
Members of the European Parliament (MEPs) have voted in favour of
legislation to tighten the regulation of credit ratings agencies (CRAs), reduce
the reliance on agency ratings and restrict the scope for conflicts of
interest.
MEPs in the Economic and Monetary Committee in Brussels supported
the draft CRA reform legislation on 19 June, arguing
that the proposed legislation would inject more responsibility, transparency
and independence into credit rating activities. This would, in turn, help to
enhance the quality of ratings issued in the EU, thereby
improving protection for users and investors.
“The
debt crisis in the eurozone has shown that CRAs have gained too much influence,
to the point of being able to influence the political agenda. In response
we have strengthened rules on sovereign debt ratings and conflicts of interest,” said
Leonardo Domenici, the
MEP steering the proposed reform through the European Parliament. Domenici
represents the Italian Democratic Party and is a member of the Socialists and
Democrats (S&D) parliamentary group.
The proposed reforms include regulation of the
quality, timing and frequency of sovereign debt ratings, which MEPs noted
directly affect the credibility of states, and hence their borrowing costs.
MEPs also want ratings to reflect each country’s specific characteristics, and not
to serve as an advocate for policy changes.
MEPs
inserted amendments that would require CRAs to prepare and publish an annual
timetable of dates for publishing their sovereign ratings, so as to give states
time to prepare for them. The timetable would have to comply with the general
rule that sovereign credit ratings may be published only after close of
business in all trading venues established in the EU and at least one hour
before they reopen.
MEPs
also took the first step towards developing an internal public rating capacity
at EU level. The task of creating an independent EU creditworthiness assessment
will be entrusted to existing EU institutions, which will provide investors
with all relevant, publicly-disclosed data and ratings regarding the sovereign
debt and key macroeconomic indicators.
There
was also agreement among MEPs that over-reliance on ratings should be reduced.
Regulated financial institutions – including banks, insurance companies and
investment fund managers – would be required to develop their own rating
capacities, to enable them to prepare their own risk assessments and thus not rely
entirely on external ones. Furthermore, no EU law would be permitted to refer
to credit rating for regulatory purposes, and regulated financial institutions
would not be permitted to sell assets automatically in the event of a
downgrade.
MEPs
are also proposing that CRAs are required by law to ensure their ratings are
impartial and of high quality. They could be held liable for them in civil law,
so that any investor whose interests were harmed when buying or selling a rated
instrument could sue the rating agency if it could be shown that it had made
methodological mistakes or committed other infringements specified in the EU
regulation. The civil law rules applicable would be those of the investor’s
country of residence when the damage occurred.
The
European Securities and Markets Authority (ESMA) would check rating
methodologies, and ratings themselves would have to be presented in numbers.
They would also have to indicate the probability of default and be accompanied
by an explanatory statement.