Brussels, 16/06/2008 (Agence Europe) - A change of course. Early in 2006 and 2007, the European Commission's position was that European legislation specifically governing the activities of financial ratings agencies was unnecessary (see EUROPE 9106, 9341). However, the international financial crisis initiated by the American sub prime mortgage market crisis means that there is now no way round it. The ratings agencies have been criticised for allegedly failing to alert investors early enough to the risks brought about by certain economic actors who had been hit by the mortgage crisis. Furthermore, the economic model of these agencies is enough to raise the spectre of possible conflicts of interest, as they are paid by the economic actors applying for a rating. Since last autumn, Commissioner McCreevy, who is in charge of the internal market dossier, has been bringing pressure to bear on the ratings industry, calling on it to make substantial proposals to reform its internal rules. If it does not, he will launch a regulatory initiative (see EUROPE 9598). This initiative is now definite.
"I am convinced that sensible and targeted regulatory measures are now needed for the ratings agencies operating on the structured credit markets in Europe", said Mr McCreevy, at the inauguration in Dublin on Monday 16 June of an international financial services conference centre. Taking the view that the proposals recently put forward by the Committee of European Securities Regulators (CESR) and the International Organisation of Securities Commissions (IOSCO) are insufficient, he added that these measures would cover "registration, external control and an improvement in internal governance" of the ratings agencies. He stated that external control was "absolutely necessary" for the policies and procedures of the ratings agencies, but "inappropriate" for the drafting of models used for ratings. According to the commissioner, the envisaged measures should ensure that the sales of ratings agencies' services are kept rigorously separate from ratings activities. They may also encourage the entry onto the market of newcomers working with different economic models.
The nature of the announced regulatory initiative is as yet unclear. The legislative proposal may constitute a specific text or be part of a revision of the existing European rules. It is worth noting that in the context of European efforts to respond to the financial crisis, Mr McCreevy has already announced that in September or October, he is to propose a revision of the European "Bâle II" directive governing own-capital requirements (see EUROPE 9634). In Dublin, he went no further than to indicate that the measures concerning the ratings agencies would be on the table of the Council and of the European Parliament "in the next few months". However, the subject may be included on the agenda of the Ecofin Council of July, the first to be held under the French Presidency. (M.B./transl.fl)