Brussels, 5 November 2010
Financial services: The European Commission consults on further policy in the field of credit rating agencies
As part of its further work in creating a sounder financial system, the Commission services have launched today a broad consultation on credit rating agencies (CRAs). Whilst credit rating agencies are important actors in the financial markets, recent developments during the euro debt crisis have shown that there may be a need to re-examine certain aspects of the current regulatory framework. There are growing concerns that financial institutions and institutional investors may be relying too much on external ratings and do not carry out sufficient internal credit risk assessments, which may lead to volatile markets and instability of the financial system. The purpose of this consultation is to open a wider debate and get input from all stakeholders in order to calibrate the scope and ambition of any possible future legislative initiative in the field of credit rating agencies. These issues are similar to those raised at a global level in the recent Financial Stability Report. The deadline for replies is 7 January 2011.
Internal Market and Services Commissioner Michel Barnier said: "We need to learn all the lessons of the crisis. We have already Introduced EU-wide rules for better supervision and increased transparency in the credit rating market. This was an important first step. But we need to think about step two: the role of ratings themselves and the impact they can have on markets. Today, we are launching a consultation where we ask all the questions that need to be asked. The feedback we get will help us determine what further action is needed."
On 7 December 2010, a new EU regulatory framework applicable to the credit rating sector will come into force. New rules will require credit rating agencies to comply with rules of conduct in order to minimise potential for conflicts of interest, ensure higher quality ratings and greater transparency of ratings and the rating process. (See IP/09/629).
However, learning lessons from the recent euro debt crisis, some issues related to credit rating agencies still need to be sorted out. The consultation launched today asks a whole series of questions to gather views from all stakeholders on possible initiatives to strengthen the regulatory framework further for credit rating agencies.
Questions asked include:
- Overreliance: the recent euro debt crisis has renewed concerns that financial institutions and institutional investors may be relying too much on external credit ratings. The question should be asked as to whether it is right that European and national legislation refers to credit ratings, thus giving them a very important role, and whether alternatives could exist. The Commission therefore asks which measures could reduce this possible overreliance and increase disclosure by issuers of structured finance instruments in order to allow investors to carry out their own additional due diligence on a well-informed basis;
- Improving sovereign debt rating: sovereign debt ratings play a crucial role for the rated countries, since a downgrading has the immediate effect of making a country's borrowing more expensive. Given the importance of these ratings, it is essential that ratings of this asset class are timely and transparent. While the EU regulatory framework for credit ratings already contains measures on disclosure and transparency that apply to sovereign debt ratings, further measures could be considered to improve transparency, monitoring, methodology and the process of sovereign debt ratings in EU;
- Competition: Only a handful of big firms make up the CRA sector. There are high barriers to entry. Concerns have been expressed that the rating of large multinationals and structured finance products is concentrated in the hands of only a few CRAs. This lack of competition could negatively impact the quality of credit ratings. The Commission asks what options exist to increase diversity in this sector;
- Liability: the rules on whether and under which conditions civil liability claims by investors against credit rating agencies are possible currently vary greatly between Member States. It is possible that these differences could result in CRAs or issuers shopping around, choosing jurisdictions under which civil liability is less likely. The Commission asks whether there is a need to consider introducing a civil liability regime in the EU regulatory framework for CRAs;
- Conflicts of interest: The "issuer-pays" model raises questions of conflict of interest. This model is when issuers solicit and pay for the ratings of their own debt instruments. This model is the prevailing model among CRAs. As rating agencies have a financial interest in generating business from the issuers that seek the rating, this could lead to assigning higher ratings than warranted in order to encourage the issuer to more business with them in future for example. It may also lead to practices of "rating shopping", which is when an issuer chooses a CRA on the basis of its likely rating. The Commission asks what evidence there is for such practices and whether alternative models would be possible.
On the basis of the replies to the consultation, the Commission will decide on the need for any measures in 2011.