Brussels, 01/08/2008 (Agence Europe) - There will be much head-scratching in the financial world in August. The European Commission has launched a public consultation exercise that will run until 5 September 2008 on the idea of introducing an EU regulatory framework on the authorisation, operation and supervision of credit rating agencies (CRAs). It also wants to receive the views of interested parties - investors, rating agencies and national supervisory authorities - on the best political approach to ensure financial players pay less attention to ratings when making investment decisions. Announced in June 2008 by EU Internal Market Commissioner Charlie McCreevy (see EUROPE 9683), legislation will be unveiled by October 2008, the deadline set by the Commission for unveiling legislative proposals in time for them to be adopted before the end of the current Commission's term of office. EU legislation on financial services issues is adopted using the 'codecision' procedure under which the European Parliament and the Council are co-legislators. Early in July this year, the ECOFIN Council gave the go-ahead for the creation of an EU registration system for credit rating agencies (see EUROPE 9698).
Registration. The financial crisis has shown that rating agencies underestimated the dangers of certain structured credit products and delayed changes in the ratings they had given such products even while the market situation was deteriorating. The main aim of the legislative proposal - whether it would take the form of a directive or a regulation has not yet been decided - would be to ensure that credit rating are reliable and accurate. The negative influence on ratings of conflicts of interest which could impact on relations with establishments paying a rating agency to obtain a rating would also have to be minimised. The quality of ratings rules and lack of transparency in the way rating agencies operate would also be improved. In a consultation document, the European Commission puts forward a series of obligations that rating agencies would have to respect in order to be authorised in the EU. These requirements cover organisational structure, internal governance, ratings quality and transparency in the setting of ratings. They will not interfere with the contents of the rating, which will remain under the full responsibility of the rating agency.
Options. The directive or regulation will introduce a one-stop shop system managed by a single body, to which rating agencies would apply for EU authorisation. The Commission suggests that the Committee of European Securities Regulators (CESR), which comprises the 27 Member States' national regulators, or a special EU body created for the purpose could carry out this task. The new system would also have to boost the coordination of national regulators to ensure effective supervision of rating agencies - or even issue penalties against them. Two regulatory options are being consulted upon: firstly, giving the CESR a key role. It would receive authorisation requests from rating agencies, use special criteria to designate a national authority to issue authorisations that would apply across the EU. It would have the main responsibility for supervising the agency. The second option is to set up an EU agency with its own legal status either by adapting the CESR or by introducing an entirely new body. This new agency would be responsible for the authorisation process and, even if supervision remained in the hands of a national authority designated in line with certain criteria, it would have the power to intervene in the event of shortcomings by the national supervisory authority. This discussion will be joined up with the current reflection on giving a greater role to the EU 'Level 3' Lamfalussy Process committees used when drawing up EU law on financial services (see EUROPE 9660).
Excessive reliance on credit rating is considered one of the causes that sparked the current financial crisis, explains the Commission, arguing for investors to not be forced (or even encouraged) to base their decisions on credit ratings. The Commission is carrying out a stock-take of EU legislation applicable to credit rating agencies. This stock-take reveals that Directive 2006/48/EC on credit establishments is the most explicit item of legislation, giving 'particular importance' in the Commission's view to ratings in terms of exposure to securitised assets. In this connection, the European Commission is preparing measures for the start of next year that would require banks to do more than simply use reports from credit rating agencies. If banks fail in their obligations, they would lose the right to deduct their exposure to securitised assets from their capital requirements. The Commission is calling on interested parties to express their views on whether to force investors to make greater use of their own risk assessments when making decisions; or rather to force ratings agencies to publish 'health checks' on the risks inherent in certain financial assets in addition to their ratings; or to examine on a case-by-case basis (rather than amend) references to rating agencies contained in EU financial services law. (M.B. transl fl)