Credit rating agencies will face mandatory new European Union regulation, EU Internal Market Commissioner Charlie McCreevy said today, following criticism about their role in the US subprime crisis.
The new rules would affect agencies including Moody's, Standard & Poors and Fitch which dominate the hitherto lightly regulated sector.
Former Irish Minister for Finance Mr McCreevy said in a speech, prepared for delivery in Dublin and made available in Brussels, that self-regulation had proved insufficient, calling their voluntary code of conduct "a toothless wonder".
I am convinced meaningful but targeted regulatory measures are now necessary for rating agencies operating in the structured credit markets in Europe Internal Markets Commissioner Charlie McCreevy
Market regulators have just beefed up the code but it remains voluntary and Mr McCreevy said mandatory rules were needed, dismissing the view of market watchdogs in the EU that a voluntary approach should still continue.
"I am convinced meaningful but targeted regulatory measures are now necessary for rating agencies operating in the structured credit markets in Europe, including registration, external oversight and much better internal governance," he said.
Registration of credit rating agencies was introduced in the United States last year, bringing them under direct supervision of market regulator the Securities and Exchange Commission.
France takes over the EU presidency next month and French Finance Minister, Christine Lagarde, has said she will start a debate among EU finance ministers on whether registration should be introduced in the 27-nation bloc.
Mr McCreevy has sole right to initiate EU financial services rules but EU states and the European Parliament have final say on their shape and adoption.
Such rules are seen as necessary to help avoid a repeat of the financial market turmoil that began last August with defaults in US home loans and triggered a global credit squeeze.
Many officials and analysts are concerned that agencies are paid by the companies whose creditworthiness they rate. Many US mortgage-related structured products sank in value despite an initially high rating.
Mr McCreevy said the new legislation would aim to bring new rating agencies into the market.
"I hope we can also craft these measures in a way that will encourage entry to the market by new players, working perhaps on a different business model," he said, adding the Commission would draft new measures in coming months.
A spokesman at Fitch said, "No comment at the moment until we have a chance to see the proposals and review them." Standard & Poor's officials could not immediately be reached for comment. No one Moody's was immediately available to comment.