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Making credit rating agencies more accountable - 17/11/2011

A hand holding a pen pointing to a trading chart on an LCD screen © iStock/archives

EU seeks to strengthen oversight of credit ratings agencies as part of ongoing financial market reforms.

Since the start of the economic crisis, the EU has introduced reforms to improve regulation of its financial markets and protect investors.

One change was to strengthen oversight of credit rating agencies, to reduce possible conflicts of interest, make them more accountable, and provide more information to investors. They are now supervised by the EU’s new European Securities and Markets Authority (ESMA), which can penalise them for breaking the rules.

Stricter rules needed

However, the eurozone’s ongoing debt crisis has exposed areas where further oversight is required. To fill those gaps, the Commission is proposing new measures to help stabilise financial markets and provide investors with better information about credit risk.

A rating is an assessment of creditworthiness – for example, the risk of investing in the debt issued by a particular company or country. It can have a huge impact. Downgrading a national rating can lead to higher interest rates, making it more expensive for that country to borrow money.

The new measures would:

  • reduce over-reliance on ratings – financial institutions would not blindly rely only on credit ratings when picking investments. They would be required to make their own assessments. Agencies would have to provide more details about their ratings.
  • require more frequent assessment of national debt ratings – agencies would have to update EU countries’ ratings twice a year (instead of once). To avoid market disruption, national ratings would only be published after the close of business and at least one hour before the opening of trading venues in the EU.
  • ensure independence – debt issuers would have to rotate every 3 years between the agencies that rate them. In addition, ratings from 2 different rating agencies would be required for complex debt investments. A big shareholder of a credit rating agency could not simultaneously be a big shareholder in a competitor.
  • make agencies more accountable – investors would be able to bring civil liability claims against an agency if it intentionally or negligently broke EU rules.

The proposals now need approval from EU governments and the European Parliament. The law is expected to come into force at the end of 2012.

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