Financial Services & Fintech
Brussels clamps down on Credit Rating Agencies
The Financial Services Chief of the European Union Michael Barnier declared on the 27th November 2012 that credit rating agencies are to follow stricter rules so as to make them accountable for mistakes in case of negligence or intent. It is believed that these rules will improve financial stability throughout the EU and “substantially” reduce the chances of another financial crisis. This agreement made at EU level to impose such rules stems from the concern that the actions of such agencies, although somewhat subjective in their reasons for acting, have a tangible effect on the economies of Member States.
The new rules will severely hinder such agencies from publishing sovereign debt ratings of an unsolicited variety as well as compelling them to set up a calendar clearly indicating when they will rate any EU Member States. The reason underlying the imposition of this calendar is to prevent any sudden disruptions in the European market.
These ratings, under the new rules, will only be published after the close of business and at least one hour before the opening of trading venues in the EU. When the ratings are published, they will clearly inform investors and EU countries of the assumptions and facts considered in establishing the countries’ sovereign debt.
Investors will also be prevented from owning a heavy stakes in more than one credit agency. This will hopefully ensure that such agencies remain impartial in their analyses. Furthermore, agency mergers will be restricted so as to boost competition. This would create a situation where all agencies would be at even greater risk for publishing inaccurate information.
Barnier also proposed a system where companies are compelled to rotate the credit ratings they refer to in the course of their business. This proposal met with heavy opposition and was done away with on the basis that businesses showed concern that they might find themselves referring to information from agencies which they perceived to have less credibility in their territory.
All that remains is for the deal to be adopted by the EU Parliament during a plenary session.