Credit rating agencies failed to detect the worsening of the financial market conditions and to adapt their ratings in time, which is why it is necessary to regulate all ratings used by EU financial intuitions, says the committee.
Rotation mechanism to avoid conflicts of interest
Avoiding existing or potential conflict of interest between the agency issuing the rating and the rated organisation is a key aim of the legislation.
A rotation mechanism will have to be put in place to ensure that CRA analysts who are in direct contact with the rated entity, elaborate ratings for the same organisation for longer than five years, say MEPs. To avoid negative effects on CRA performance, the approved text stresses that rotation should be on an individual basis rather than changing the entire team.
The committee also agrees that each CRA must disclose the compensation arrangements agreed with its clients.
A greater European dimension in the registration and supervision of CRAs
The Economic Affairs Committee amended the Commission proposal to make the Committee of European Securities Regulators (CESR) the only registration and supervisory body over European rating agencies.
The CESR, and not national authorities as originally proposed, would be in charge registering CRAs, checking their compliance with the rules and ultimately withdrawing an agency's registration should the rules be breached. The CESR would inform Member State authorities once all registration steps are accomplished.
Finally, the European body would also be in charge of monitoring CRAs' past performance and publishing statistical data on the reliability of ratings issued.
Call for an independent EU rating agency
The committee proposes setting up a new, independent and non-profit making credit rating agency to improve quality of European ratings put forward by the economics committee. The new organisation would have to be founded by the EU, the European finance industry and by the rated entities.
Committee members call on the Commission to put forward the requisite legislative proposal.
Ratings from non-EU agencies will need endorsement
Another issue is how to let European investors use non-EU ratings whilst maintaining the same criteria as for EU ones.
MEPs agree that non-European ratings will have to be endorsed by an EU agency, unless the third country rating complies with equivalent criteria to those provided by this legislation. A list of third-country legislation considered equivalent to the proposed EU regime will be prepared and regularly updated by the Commission.
