EU to supervise rating agencies

Credit rating agencies will for the first time have to register and be supervised to operate in the European Union under a law…

Credit rating agencies will for the first time have to register and be supervised to operate in the European Union under a law adopted by the European Parliament today.

The move will affect the big three in particular - Standard & Poor's, Moody's and Fitch.

They have been criticised for being too slow to warn investors of the risks in complex securitised products that have become largely untradeable in the credit crunch despite having had high ratings.

The Parliament voted 569 in favour of the draft law, with 47 against and four abstentions.

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Ambassadors from EU states had signed off on a joint deal this morning agreed informally beforehand with parliament.

The G20 group of industrial and emerging market nations has decided that credit rating agencies across the world should register and be directly supervised if they want to offer ratings to investors.

EU Internal Market Commissioner Charlie McCreevy penned the law after accusing the agencies of failing to "sniff the rot" in some securitised products in good time.

"With this regulation the EU is setting an example to be followed and matched," Mr McCreevy said in a statement.

"We expect the conduct of the credit rating agencies to be significantly improved as a result of this regulation, with clear benefits to the integrity and stability of the financial markets," Mr McCreevy said.

The agencies provide ratings on the creditworthiness of companies and countries which investors use to make decisions.

Under the new rules, the Committee of European Securities Regulators (CESR), made up of national securities markets watchdogs, will be the first point of contact in the EU for registration.

So-called colleges of supervisors will be set up for each rating agency operating in the EU, comprised of supervisors from all countries in which the company offers ratings.

"Formal oversight by securities regulators in the EU of ratings firms' policies and processes - combined with the ongoing intensive scrutiny of credit ratings by the market - will mean more transparency and accountability for ratings providers, and greater confidence in ratings," said S&P President, Deven Sharma.

The new rules aim to improve how ratings are arrived at and deal with conflicts of interest, as agencies are paid by the companies they rate.

Staff will be rotated at regular intervals to cover another sector in order to avoid becoming too close to a particular client, as clients pay agencies for ratings on their debt.

At least two board members of each agency must be independent with their remuneration not based on the performance of the ratings business. One of the members must also be an expert in securitisation and structured finance.

Standard & Poor's and Moody's are US-based but their branches in the EU will have to endorse any ratings issued by the US parents that are offered in the 27-nation bloc.

Reuters