The proposed legislation aims to reduce investors´ over-reliance on external credit ratings of sovereign debt, address conflicts of interest in agency activities and increase transparency and competition in the sector.
When a credit rating agency downgrades a country´s credit rating, it becomes more expensive for it to borrow money and more difficult to cut debts. The higher borrowing costs will also affect the services offered to ordinary citizens.
The debt crisis in Europe shows that the existing regulatory framework does not suffice. When nine eurozone countries were downgraded by Standard & Poor´s in January 2012, it led markets to speculate on the break-up of the eurozone.
One goal is to reduce the reliance on rating agencies. Credit institutions and investment firms will have to put into place internal procedures for assessing their own credit risk, while issuers of structured finance instruments will be required to seek two ratings at once from two different agencies as well as to switch to a different agency every four years.
There should also be more transparent and more frequent sovereign debt ratings. There would be stricter controls on when credit rating agencies could publish their rating of sovereign states, which would only be at specific times of the year. Agencies would need to explain the key factors underlying their ratings and refrain from making any direct or explicit recommendations on countries´ policies. In addition they would not be able to issue explicit recommendations on member states´ policies.
Conflicts of interest should also be eliminated.This is why shareholdings of credit rating agencies in rated agencies would be capped. The new rules would prohibit agencies´ shareholders with 10% or more of the capital or voting rights from holding 10% or more of a rated entity. They will also be prevented from owning 5% or more of the capital or voting rights in more than one agency unless the agencies involved belong to the same group.
Finally, credit rating agencies should become more accountable for the ratings they provide. Investors or share issuers will be able to claim damages for ratings that prove to be ill-founded and harm their interests.
The rules would apply to all credit rating agencies operating in the EU.
Aim of the Regulation: Members stress that the common regulatory approach should enhance the independence of credit rating activities.
“Credit rating”: this means an information service provided to investors and consumers, issued using an established and defined ranking system of rating categories and subject to a liability regime.
Over-reliance on credit ratings in Union law: Members consider that Union law shall not refer to credit ratings for regulatory purposes. They require that all provisions contained in sectoral legislation that provide for an obligation to take into account external ratings before investing or advising others to invest shall be repealed.