EU proposes crackdown on ratings agencies after ‘serious mistakes

The European Commission (EC) has proposed a crackdown on ratings agencies such as Standard & Poor’s (S&P) and Moody’s which would see them held accountable for mistakes and ensure they followed stricter rules.

Coming just a week after S&P mistakenly told some of its clients France had lost its AAA status, the Commission proposed a number of sweeping changes which would see stricter rules come in for credit rating agencies that rank countries’ and companies’ debt.

It said agencies should be more transparent about their ratings and be held accountable for any mistakes they make.

The EC’s internal market commissioner, Michel Barnier, said the ratings had a serious and widespread effect on individuals.

“Ratings have a direct impact on the markets and the wider economy and thus on the prosperity of European citizens,” he said. “They are not just simple opinions.”

He also said they were not infallible in their assessments and had made “serious mistakes” in the past.

As well as last week’s error from S&P, investors have also blamed ratings agencies for sparking the financial crisis in 2008 after they gave top grades to complicated packaged debt instruments including sub-prime mortgages.

Downgrades recently across Europe have also contributed to panic in markets, with yields on bonds spiking to record levels as investors worry about the solvency of sovereigns.

While the downgrades may have been justified, the EC was critical of the timing of some of the actions taken by the agencies.

Barnier said: “I have also been surprised by the timings of some sovereign ratings – for example, ratings announced in the middle of negotiations on an international aid programme for a country.

“We can’t let ratings increase market volatility further.”

He said any agency that breaches credit rating agency regulations should face legal repercussions in the courts.

As part of the proposals, he added there should be more competition in the sector.

In a final move, he also said rating changes should first be alerted to the European Securities and Markets Authority (ESMA), which would then publish them. Any changes to a rating should be made public outside of European trading hours in order to reduce market turmoil.

The proposals will pass to the European Parliament and the Council (member states) for negotiation and adoption.


This article was first published on Investment Week

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