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13th Aug 2020

Brussels turns regulatory eye on rating agencies

The European Commission has unveiled a proposal to regulate credit rating agencies, boasting the blueprint goes further than legislation anywhere else in the world in its attempt to prevent future turbulence based on false ratings of various market actors.

"These very exciting rules are necessary to restore the confidence of the market in the ratings business in the European Union," said EU internal market commissioner Charlie McCreevy when presenting the document to journalists on Wednesday (12 November).

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The package includes measures aiming to boost the transparency of the bodies whose malpractice is viewed by some policy makers as one of the factors behind the current financial crisis - by introducing an obligation for them to disclose the models, methodologies and key assumptions on which they base their ratings.

Apart from a broader disclosure, credit agencies will in future have to undergo a newly established registration procedure and face an "effective surveillance regime" by European regulators, under the proposed rules.

Finally, the bill tackles the issue of possible conflict of interest by forbidding rating agencies from providing advisory services, and by introducing the practice of a minimum of three independent directors on an agency board whose pay cannot depend on the business performance of the rating agency.

"The proposal is in my view well balanced. It ensures the analytical independence of credit rating agencies while at the same time ensuring that they are subject to effective oversight to ensure that professional standards are applied," argued Mr McCreevy.

German Liberal Wolf Klinz praised the plan, noting that it will "ensure an orderly admission of rating agencies, more transparency and an enhanced co-operation between the national supervisory authorities."

Better regulation

But analyst Nicolas Veron from the Brussels-based think-tank Bruegel argues that the commission is exaggerating the role that credit agencies have played in the financial crisis.

"This regulation responds to obvious political demand," Mr Veron told the EUobserver, adding that it was "rushed" and not enough stakeholders had been consulted. Such an approach could have even worse consequences if taken when Brussels comes forward with other legislative initiatives related to market turmoil.

The analyst argues that the credit agencies showed a lack of understanding and research as they "didn't see the crisis coming" but that will not primarily be changed due to a stricter regulation.

"With some aspects - especially those on disclosure - I could definitely agree but I think the commission goes a bit too far in prescribing how the rating agencies should behave in different aspects of their life," he said. The "political approach" taken by the EU executive is contradictory to its "doctrine of better regulation," Mr Veron noted.

Ambitions and scepticism

Commissioner McCreevy denied accusations of over-regulation, pointing out that he has been already associated with the fight against it in the EU corners.

He also played down concerns over a possible shift of capital away from Europe: "I think that in the new market that is developing from the financial turmoil, investors are going to be particularly careful on where they invest their money. They will invest money in jurisdictions where they think there are high standards," he said.

The Irish commissioner believes the EU's rules - which must yet be agreed to by the European Parliament and national governments - will set an example for other global powers.

"While we are setting standards for the EU, we want these to become global standards, and we will discuss them with our main international partners with that objective in mind," said Mr McCreevy.

The reform of rating agencies is on the European to-do list for the financial market overhaul. A global overhaul of finance oversight is set to be debated at a series of G20 summits of leading industrialised and emerging economies, with the first such gathering scheduled for 15 November.

But Mr Veron is sceptical also about this initiative, particularly in its early stages in which president-elect Barack Obama has yet to replace the "lame duck" administration of outgoing President George W. Bush.

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