EU presses ahead with tougher regulation of rating agencies

The European Parliament today voted in favour of a new regulation that will force credit rating agencies (CRAs) to comply with minimum standards of good practice and transparency.

The regulation was adopted with 569 votes in favour, 47 votes against and four abstentions. Members of the European Parliament noted that CRAs had failed to adapt to the risks posed by the credit markets and to detect the worsening of financial market conditions in due time.

Under the new rules, CRAs operating in the European Union will need to register with the Committee of European Securities Regulators, which will be responsible for their day-to-day supervision.

Registered CRAs will be required to ensure ratings are not affected by conflicts of interest and to remain vigilant on the quality of the rating methodology. They will not be allowed to rate financial instruments without sufficient prior information; they must disclose their models, methodologies and assumptions and produce an annual transparency report; and they will have to create an internal function to review the quality of their ratings.

"We expect the conduct of the CRAs to be significantly improved as a result of this regulation, with clear benefits to the integrity and stability of the financial markets," said EU internal market and services commissioner Charlie McCreevy.

The new laws will become legally binding by 2010 and will affect any CRA operating in the EU, including the European subsidiaries of Standard & Poor's and Moody's.

See also: Banks suffer from stricter ratings criteria