Brussels, 26/11/2012 (Agence Europe) - Representatives of the EU27 member states and the European Parliament will be meeting with the European Commission on Tuesday to discuss changes to the EU rules on credit rating agencies. Outstanding issues include the new requirement for rotation of rating agencies, rating agencies' civil liability and the rating of sovereign debt. It is hoped everything can be ironed out by the end of the year.
At the previous three-way meeting of this nature (last week), a compromise drafted by the Cypriot Presidency made it compulsory for rating agencies to be rotated in order to encourage greater diversity and restrict conflicts of interest. The talks focussed on rotation frequency how far the rotation would extend, with the ministers wanting it to apply solely to complex financial products.
Civil liability. The Commission suggests that in the future, credit rating agencies should be held liable for both negligence and intent. Financial players would be able to take civil action against an agency it believes has deliberately or unintentionally infringed EU legislation. The Commission says the burden of proof that it had acted properly would be on the rating agency with investors solely responsible for providing evidence to back up their claim. The European Parliament agrees with the idea of unlimited civil liability, but the Council wants civil liability to be confined to the specific contract between the issuer and the rating agency and wants the burden of proof to fall on the issuer. A representative of the ratings industry said that the problem with civil liability is that big investors seek insurance against any possible loss, because what would happen if a case were lost and one didn't have the necessary financial wherewithal? The representative therefore didn't believe the measure would encourage competition. Earlier this month, the Australian courts found S&P guilty of falsely rating complex financial products in which 13 Australian municipalities had lost investments of €13 million.
On the rating of sovereign debt, the idea is to restrict the number of ratings of public debt unsolicited by the country in question, although additional ratings would be possible on an exceptional basis in limited circumstances.
Other aspects of the new rules include limiting to a certain percentage (yet to be defined) cross-shareholding (of shares in an issuer and shares in a credit rating agency). Over and above stricter transparency rules, the Commission wants agencies to be banned from rating an issuer which holds over a certain percentage of the rating agency's shares. The above-mentioned rating agency representative wondered how it would be possible to learn the identity of a rating agency's entire portfolio of investors, admitting, however, that conflicts of interest could certainly exist. (MB/transl.fl)