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Brussels, 3rd June 2010
Improving EU supervision of Credit Rating Agencies - frequently asked questions
(see also IP/10/656)
Why is the European Commission proposing amendments to the Credit Rating Agencies (CRAs) Regulation?
The Credit Ratings Agency Regulation was adopted in April 2009, following a proposal by the Commission in 2008. More information on the content of the regulation can be found in the attached press release: IP/09/629
At the June 2009 European Council, Heads of State and Government called upon the Commission to come forward with proposals on a centralised system for supervision of Credit Rating Agencies (CRAs) at EU level. The European Commission has now delivered on this by proposing amendments to the supervisory framework for CRAs. Under the Commission's proposal, the European Security Markets Authority (ESMA), a new European supervisory authority should have direct supervisory powers over credit rating agencies. This is in line with the recommendations from the De Larosière group, who made the case for centralised EU supervision of CRAs in its report of 25 February 2009. The European Parliament also requested centralised supervision for CRAs at the moment of the negotiation of the CRA Regulation.
In 2009, when the current CRA Regulation (which will be fully effective from December 2010) was negotiated, it was considered to entrust an EU agency with the registration of CRAs. However, at that time, the establishment of a new European supervisory architecture with European Supervisory Authorities had not yet been decided. Therefore, the CRA Regulation introduced a supervisory model in which national competent authorities working together in colleges and coordinated by the existing Committee of European Securities Regulators (CESR) would be responsible for the supervision of CRAs. The CRA Regulation stated though in a recital that the college structure should only be a preliminary solution and advocated a more consolidated supervisory framework in the mid term.
How will registration and supervision of CRAs be organised?
Through the European Securities and Markets Authority (ESMA) which will be responsible for:
What will be the role of national competent authorities?
While the Regulation that is proposed today transfers all supervisory powers to ESMA, it foresees the possibility for ESMA to delegate powers back to national authorities where this makes sense, for example with regard to on-site inspections.
In return, national competent authorities will be able to request ESMA to examine whether the conditions for the withdrawal of a CRA's registration are met or whether the use of credit ratings issued by a CRA should be suspended based on their assessment of a serious and persistent breach of the Regulation. ESMA will issue detailed guidelines, which can include the issue of fees and how this will be dealt with in case of delegation of powers. Responsibility will remain with ESMA.
Why should supervision be done by ESMA? Aren't national supervisors closer to the market and better equipped?
In contrast to banks and insurance companies, rating services are not linked to particular territories. They are a global business. Ratings are used by financial institutions across Europe and are not linked to where the agency is established. Following the 2009 June European Council's decision, the question for the Commission was not whether, but rather how this could best be organised. Nevertheless, ESMA will have the possibility to delegate powers back to national supervisors where it considers it useful – see previous question.
Moreover, the Commission has identified in an impact assessment several reasons why CRA supervision can be better delivered at the European level than at national level, taking into account the global structure of the CRA industry.
Notably, the proposed European supervisory framework would ensure:
What are going to be in concrete terms, the supervisory powers of ESMA with regard to CRAs?
The proposed regulation on CRAs will give ESMA all the necessary powers to carry out an effective supervision over credit rating agencies and it will be in the position to:
Can CRAs be sanctioned?
Yes. Where ESMA has found that a credit rating agency has committed a breach of the CRA Regulation, it shall take the necessary supervisory measures, taking into account the nature and seriousness of the breach. Such measures are ranging from temporary prohibition of issuing credit ratings and the suspension of the use of the credit ratings until the infringement has been sorted and even the withdrawal of registration.
In addition to this, ESMA may also request the Commission to impose on a CRA a fine, where the CRA has intentionally or negligently committed a breach of the Regulation. Those fines shall be dissuasive and proportionate to the nature and seriousness of the breach and take into account the economic capacity of the CRA concerned. Detailed criteria for establishing the amount of the fine are still to be developed.
Will EMSA also be levying fees?
Yes, it is stated in the Regulation that ESMA shall charge the supervised rating agencies. However, the details are still to be laid down by the Commission in delegated acts.
Does this proposal anticipate that other financial institutions with EU-wide reach should be directly supervised by the European Supervisory Authorities?
No. The activity of a CRA is in many regards different from that of banks or insurance companies. For instance, as most ratings are publicly disclosed to the market ,it is difficult to delimit the territorial impact of a credit rating. In contrast, the cross border impact of banking activities requiring a customer relationship is easier to assess.
How will credit rating agencies and users of ratings benefit from the new supervisory framework?
Credit rating agencies will operate in a much simpler supervisory environment, with only one centralised supervisory authority – ESMA – being responsible for their registration and supervision at EU level. The new supervisory structure also means that decisions in individual cases will take less time and the risks of incoherent application of legislation EU wide or conflicting competences between supervisors will be eliminated.
The interests of the users of ratings, in terms of higher quality of ratings and greater transparency of rating activities, will be more effectively protected as a result of establishing centralised supervision of all CRAs as there will be a fully coherent and consistent application of the CRA Regulation throughout the EU. It will be possible to report breaches of the CRA Regulation to a single supervisory authority in Europe specialised in dealing with cases involving rating activity and fully prepared to pursue cross-border cases.
Existing Credit Rating Agencies can start to register with national supervisory authorities on 7 June. Will this proposal not create legal uncertainty?
No, with the Regulation on the registration on credit rating agencies (see IP/09/629) already in full force and fully effective in December 2010, it is natural that the current regime continues as foreseen. The modifications proposed today can only enter into force when ESMA is in place. That is why today's proposal includes a provision on the transfer from national authorities to ESMA.
What is the new rule on transparency imposed on issuers of structured finance instruments?
The proposal introduces the obligation for issuers of structured finance instruments to provide access to information not only to the CRA they appoint, but to all other interested CRAs. This obligation, already existing in other third country jurisdictions, will reinforce competition between CRAs, will help avoiding possible conflicts of interest under the issuer-pays model and will enhance transparency and the quality of ratings. Moreover, the issuance of unsolicited ratings will promote the use of more than one rating per financial instrument.
Is the proposal consistent with EU law and notably the "Meroni case law" of the European Court of Justice?
The proposal is inspired by existing EU law, in particular the Regulation establishing a European Aviation Safety Agency. The proposal has been developed in very close co-operation with the Commission's Legal Service in order to make sure that it fully respects existing case law and the institutional balance foreseen in the Treaty. ESMA's supervisory powers are subject to clear conditions set out in the Regulation and in addition ESMA may not itself impose fines and penalties on credit rating agencies but only request the Commission to do so.
Is the Commission proposing that ESMA is to supervise Central Counterparty Clearing Houses (CCPs) and trade repositories as well?
This is another debate and not part of today's proposal. The Commission will return to this issue when it comes forward with proposals on safe and sound derivatives markets in the Summer.
Are today's proposals on CRAs enough to deal with the many issues which have been raised related to CRAs in the last few weeks?
Today's proposals will ensure better supervision of CRAs and greater transparency in the market. But today's proposals and the existing CRA regulation which will come fully into force in December 2010 do not deal with a number of important issues, for example: is the "issuer-pays model" sustainable and healthy? Does European and national legislation rely too heavily on ratings by CRAs? Is the CRA market not too concentrated? How do we create more competition and diversity in the CRA market? All these issues are important, and the Commission is looking at them closely – with all relevant stakeholders - and will come forward with further proposals in due course.
Does the Commission want a European CRA?
The level of competition in the rating industry is a real concern. The Commission believes the CRA market is too concentrated, and more competition and diversity would be positive. The Commission is examining structural solutions including whether a European credit rating agency would be beneficial and whether independent public entities should have a stronger role in the issuing of ratings. No decisions have been taken at this stage, and all options are open. The Commission's objective is have the right framework in place to enhance competition in the rating business.