Stricter European Union rules on credit ratings agencies will go into force on June 20, the European Commission said in a statement. The new rules are meant to make the ratings agencies more accountable for their actions and reduce over-reliance on credit ratings, the EC said.
“Under the new legislation, credit rating agencies will have to be more transparent and accountable when rating sovereign states. The new rules will also contribute to increased competition in the ratings industry currently dominated by a few market players and will reduce the over-reliance on ratings by financial market participants,” internal market and services commissioner Michel Barnier said.
Credit ratings agencies could be held liable if they infringe “intentionally or with gross negligence” the EU Regulation on credit rating agencies (Regulation 1060/2009), causing damages to an issuer or investor.
The agencies will be required to publish a calendar of when they will rate EU’s member states, limiting them to three rating actions a year for unsolicited sovereign ratings; derogations would be allowed only “in exceptional circumstances and subject to appropriate explanations,” the EC said.
All available ratings will have to be published on the European Rating Platform, once it becomes available in June 2015. This will improve the comparability and visibility of ratings of financial instruments rated by rating agencies registered and authorised in the EU, according to the Commission.
The new rules are also meant to reduce reliance on external ratings, requiring financial institutions to strengthen their own credit risk assessment and not to rely solely and mechanistically on external credit ratings.
“European Supervisory Authorities should also avoid references to external credit ratings and will be required to review their rules and guidelines and where appropriate, remove credit ratings where they have the potential to create mechanistic effects,” the EC said.
The new rules were proposed by the European Commission in November 2011 to strengthen existing legislation passed in 2009 and 2010 in the wake of the euro zone crisis.
(Photo: G Schouten de Jel)