Credit ratings are opinions issued by credit rating agencies (CRAs) on the creditworthiness of a company, a financial instrument or a country. Such opinions have a direct impact on the actions of investors, borrowers, issuers and governments. For example, a corporate downgrade can have consequences on the capital a bank must hold while a downgrade of sovereign debt can make a country's borrowing more expensive.
EU rules on reducing over-reliance on credit ratings (Directive 2013/14/EU) should have been transposed into national law by 21 December 2014. As Luxembourg failed to transpose the Directive, the Commission sent a letter of formal notice on 29 January 2015 followed by a reasoned opinion on 19 June 2015. With no response as of yet, the Commission has now decided to refer the country to the Court of Justice of the EU. On the basis of the procedure set out in Article 260(3) of the Treaty on the Functioning of the European Union (TFEU), the Commission is asking the Court to impose a penalty on Luxembourg to the amount of € 6 700 per day until the law is fully transposed into national legislation.
The penalties, which will be ultimately decided by the Court not exceeding the amount specified by the Commission, will take into account the seriousness and duration of the infringement and the deterrent effect reflected in the ability to pay of the Member State. In the present case, they consist of daily penalty payments proposed to be paid from the date of the judgment – assuming the Member State has still not completely transposed the obligations of the Directive until full transposition has been achieved.
As a response to the financial crisis, and in line with G20 commitment, new rules on credit ratings and Credit Rating Agencies entered into force on 20 June 2013 (see IP/13/555 and MEMO/13/571). One of the key objectives of such rules is to reduce over-reliance on credit ratings by market players, and therefore incentivise them to make their own assessment of the risks of an investment. This regulatory package consisted of a Regulation (2013/462/EU) and a Directive (2013/14/EU).
The provisions of the Directive aim to reduce overreliance on credit ratings in the EU, while at the same time improving the quality of the rating process. Three sectors that represent a substantial part of investments made in financial markets are concerned by these rules: institutions for occupational retirement provision (IORPS), investment and management companies regarding certain funds called UCITS (or Undertakings for the Collective Investment in Transferable Securities) and Alternative Investment Fund Managers (AIFMs). According to these rules, investors should not overly rely on credit ratings, or use them as the only parameter when assessing the risks related to investments made by IORPS, UCITS and Alternative Investment Funds (AIFs). Such rules aim to complement the provisions on credit ratings contained in the Credit Rating Agency Regulation.
Under the Lisbon Treaty, which entered into force on 1 December 2009, if Member States fail to transpose EU legislation into national law within the required deadline, the Commission may ask the Court to impose financial sanctions. The daily penalty payment is calculated based on a formula, where the following elements are multiplied:
- seriousness factor;
- duration of the infringement;
- "n" factor (which varies between Member States and takes into account their GDP);
- a flat-rate amount, which currently is set at € 670 per day.
In case the transposition remains incomplete and the Court of Justice of the EU confirms the Commission's view, the daily penalty would have to be paid from the date of the judgment or a later date set by the Court until the transposition is complete. The final amount of the daily penalty will be decided by the Court, but cannot exceed the Commission's proposal.
- On the decisions of the November 2015 infringements package: MEMO/15/6006.
- On the general infringement procedure, see MEMO/12/12.
- For more information on infringement procedures: http://ec.europa.eu/eu_law/infringements/infringements_en.htm