EU Parliament sets tougher credit rating rules
New rules on when and how credit rating agencies may rate state debts and private firms' financial health were yesterday approved by the European Parliament, allowing agencies to issue unsolicited sovereign debt ratings only on set dates, and enable private investors to sue them for negligence.
Unsolicited sovereign ratings can be published at least two but no more than three times a year on dates published by the rating agency at the end of the previous year. Furthermore, these ratings can be published only after markets in the EU have closed and at least one hour before they reopen.
Investors who rely on a credit rating can sue the agency that issued it for damages if it breaches the rules set out in the legislation either intentionally or by gross negligence, regardless whether there is any contractual relationship between the parties. To reduce over-reliance on ratings, MEPs urge credit institutions and investment firms to develop their own rating capacities, to enable them to prepare their own risk assessments.
MEPs also ensured that the ratings are clearer by requiring explanations of the key factors underlying the ratings, which must not seek to influence state policies. Agencies themselves must not advocate any policy changes and agencies' shareholdings in rated firms will be capped in order to reduce conflicts of interest.
A credit rating agency will refrain from issuing ratings, or disclose that its ratings may be affected if a shareholder or member holding 10 % of the voting rights in that agency has invested in the rated entity. The new rules will also bar anyone from simultaneously holding stakes of more than 5% in more than one credit rating agency, unless the agencies concerned belong to the same group.
By 2020 no EU legislation should directly refer to external ratings, and financial institutions must not be any more obliged to automatically sell assets in the event of a downgrade.
MEP Leonardo Domenici held that, "We are taking some steps forward with this new regulation, fully in line with its basic spirit, which is to enable firms to do their own internal ratings. These should provide viable, comparable and reliable alternatives to those of the rating oligopoly.”
The Domenici report on the regulation was adopted by 579 votes to 58, with 60 abstentions and that on the directive by 599 votes to 27, with 68 abstentions. The rules have already been provisionally agreed with the Council.