Wednesday

25th May 2016

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.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

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.

Stakeholders' Highlights

  1. World VisionDeclares the World Humanitarian Summit a Positive Step in a Longer Journey to Ending Need
  2. EJCPresident Dr. Moshe Kantor on Brexit and the Jewish Question
  3. Swedish EnterprisesNew rules for posted workers - Better Protection or the End of Posting ?
  4. Innovators Under 35Meet MIT Technology Review's Innovators Under 35 Award Recipients from Belgium on 25 May, 6pm
  5. Open EuropeJoin the Brussels Brexit Debate on Wednesday, 25 May at 5:00 PM
  6. World VisionWhy The EU Needs to Put Children at the Centre of Emergencies - In Their Words
  7. ACCASustainability Reporting in Danger of Losing Its Momentum Says ACCA and CDSB
  8. Dialogue PlatformDiversity as Heritage of Humanity! Join the “Colors of the World“ Show at the EP
  9. Centre Maurits CoppietersNew Responses to the Basque Peace Process? MEP Juaristi on Stateless Challenges Conference
  10. European Healthy Lifestyle AllianceImproving Cardiovascular Health Begins by Closing the Gap in Sex Disparities
  11. IPHRBrussels Talks to Take Stock of Human Rights in Turkmenistan
  12. Belgrade Security ForumOpen Call for Applications! Join the Events Team at the 6th Belgrade Security Forum.