Monday

5th Dec 2022

MEPs agree credit rating agency crackdown

  • Standard & Poor's dominates the credit ratings market (Photo: Wikipedia)

MEPs have signed off on a deal aimed at tightening regulation of credit rating agencies, ending over one year of tortured negotiation between deputies and national governments.

The European Parliament on Wednesday (16 January) voted in favour of a cross-party compromise text agreed in November which is aimed at preventing conflicts of interest, increasing competition, and reducing the reliance of businesses and governments on credit ratings.

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Rating agencies have come under fire in the past five years, attracting blame for giving overly generous ratings to the financial instruments which caused the sub-prime debt crisis in 2007-8.

Meanwhile, EU leaders claimed that a series of rating downgrades for nine eurozone countries in January 2012 led to market speculation on the break-up of the single currency.

In light of this, EU lawmakers want to reduce the role of credit rating agencies in rating the creditworthiness of governments, and the new rules include a cap on unsolicited sovereign ratings at three per year.

Politicians have also condemned the oligopoly of the three main rating agencies - Standard & Poor's, Moody's and Fitch - which have a combined market share of around 95 percent.

Under the compromise, financial instruments would need to be rated by at least two credit rating agencies, with greater public disclosure of information on ratings, and investors given the right to claim compensation from rating agencies for sub-standard work or negligence.

In a move to prevent conflicts of interest where agencies rate organisations that they hold shares in, the new rules will prohibit agencies' shareholders with 10 percent or more of the capital or voting rights from holding 10 percent or more of a rated entity.

However, the proposal to set up a new public 'European' rating agency, as a counterbalance to the market dominance of the 'big three', was shot down in talks with ministers following studies suggesting that a publicly funded rating agency could between €300-500 million over five years. Instead, the Commission will draft a non-legislative report on the viability of a European agency by 2016.

Speaking on Tuesday (15 January) in the Strasbourg Parliament, EU single market Commissioner Michel Barnier said that "we all know that the rating agencies made a significant contribution to the financial crisis," adding that "the tools we are debating today represent an unprecedented response."

For her part, Arlene McCarthy, the centre-left Vice-Chair of the Parliament's Economic committee, commented that “credit rating agencies have evolved over recent years from an information service into quasi regulators with enormous influence over market activity." "The way they are regulated needs to reflect the power they wield,” she added.

Meanwhile, Ireland's Europe minister Lucinda Creighton, speaking on behalf of governments, said that the deal was "another step towards better regulation of the financial services industry."

The rules are to come into force in 2014.

Magazine

Brussels downgraded as EU prepares credit rating move

Brussels, home to the majority of the EU's institutions, has seen its credit rating outlook cut, just as the European Commission prepares to step up regulation of the agencies that have been criticised for their role in the Greek crisis.

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