EU Parliament Tightens Rules for CRAs to ‘Improve Quality’

Credit ratings agencies (CRAs) face increased transparency standards on how they assess a country’s sovereign ratings, under changes approved by the European Parliament, whose members voted 579 in favour and only 58 against. In a clear attempt to limit the damage that CRA sovereign risk announcements have inflicted on struggling eurozone countries in recent years, agencies will only be allowed up to three such pronouncements per year. Corporations will also gain the ability to sue them.

EU internal markets commissioner Michel Barnier said that the changes “ will considerably improve the quality of ratings”, by forcing agencies such as Standard & Poor’s (S&P), Moody’s and Fitch to be more transparent in their deliberations and with the ultimate sanction of legal proceedings if fault is found with their work.

Under the new rules, CRAs will be allowed to issue unsolicited sovereign debt ratings between two and three times a year but only on pre-agreed set dates. Furthermore, ratings can only be published after markets in the EU have closed and at least one hour before they reopen. In addition, private investors will be able to sue them for negligence and CRAs’ shareholdings in rated firms will be capped to reduce potential conflicts of interest.

Members of the European Parliament (MEPs) also voted for ratings to be made clearer by requiring CRAs to explain the key factors underlying them. Ratings must not seek to influence state policies, and agencies themselves must not advocate any policy changes, adds the text. The rules have already been provisionally agreed with the European Council (EC).

Liability Regime Established

According to Barnier: “The new rules will contribute to increased competition in the rating industry dominated by a few market players. Furthermore, the new rules will reduce the over-reliance on ratings by financial market participants, eradicate conflicts of interest and establish a civil liability regime. This matters because ratings have a direct impact on the financial markets and the wider economy and thus on the prosperity of European citizens.”

Although dissenting MEPs were in the minority, Godfrey Bloom, UK Independence party MEP and a former independent financial adviser (IFA) has been vocal in the defence of CRAs. He said last year that they had been “honest with the markets” over the “worthless” government debt of eurozone members such as Greece, Ireland and Portugal. He has expressed fears that they will become overburdened with regulation, citing the fact that CRAs will be required to gain approval for their methodologies from the European Sales and Marketing Association (ESMA) regulator if rating government debt.

Bloom commented: “I believe that this regulation [will] castrate the CRAs, and turn them into government eunuchs to vainly protect the chastity of the euro, a currency born out of wedlock and without a dowry. I fear we will find ourselves exactly back in the position where we started.” 

However, more typical was the attitude of German MEP Wolf Klinz, who said that the new rules were unlikely to change the agencies’ behaviour. “They have for a long time after the global financial crisis maintained that they had nothing to do with it. Rather than considering themselves to be primarily a service provider they were only interested in growing their business as quickly as possible,” he added.

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