Due to its alleged abuse of the monopoly position of Standard & Poor’s (S&P), the European Commission is taking legal action against the rating agency.


Rating agencies assess the credit worthiness of companies, banks and states. The principal target hereby is to reduce the information asymmetries between issuers of debt instruments and investors. The initiated proceedings, however, do not refer to this core business but to the licence fees, which S&P demands of banks or investment funds for the use of US ISIN codes in their own data bases. Applying this method, it appears that S&P is abusing its monopoly position, thereby infringing against the EU competition rules. The proceedings might result in S&P being fined; there is, however, also the possibility to demand from S&P to change its business practices within the European Union.

Also controversial is the current assessment of S&P for Spain, where Spanish government bonds were placed on the “CreditWatch Negative”. This is the first time since the start of the global financial crisis that an AAA country has received such a negative assessment. Applying this rating, S&P sends a clear message: wealthy states too can no longer automatically rely on cheap bank lending. The time of the assessment of the EU country Spain is also telling as at the same time the EU Member States and the Commission at last will adopt a sharper tone towards rating agencies.

The influence of rating agencies on financial markets is significant as their activities are under constant scrutiny from investors, issuers, borrowers and governments. In the opinion of experts, rating agencies do have significant co-responsibility for the current financial turbulences, considering the impact they have on employees. It has generally been accepted that during the past years rating agencies have massively underestimated the risk potential of credit spreads, as a result of which they have sent the wrong signals to securities dealers as well as to banks. As a result of this, the downwards spiral of the financial crisis has been significantly affected and accelerated.

Due to this (market) power of rating agencies, the Irish Commissioner McCreevy, who in the past had been criticised for his negative attitude towards regulations, arrived at the following conviction: “The rating agencies have to adhere to strict regulatory requirements to ensure that ratings are not affected by conflicts of interest that are inherent in the sector. The crisis has shown that self regulation has not worked.”

The current proposal by the Commission on regulating rating agencies should guarantee that the ratings provide investors with reliable, transparent and correct information (i.e. free of conflicts of interest). In addition, the proposal by the Commission provides for the following new regulations, which shall be guaranteed by European regulatory bodies:


  1. Rating agencies may not provide consultancy services.
  2. They may not evaluate financial instruments, unless they possess sufficient sound information to base their ratings on.
  3. They have to publish models, methods and basic assumptions on which they base their ratings.
  4. They have to publish an annual transparency report.
  5. They have to set up an internal control board for supervising the quality of their ratings.
  6. They have to appoint at least three independent members to their administrative or supervisory body, whose fees must depend on the performance of the rating agency. These members are appointed for the duration of a mandate, which must not exceed five years. They may only be dismissed on account of professional misconduct. At least one member must be an expert on securitisation and structured financial instruments


As the Commission correctly, if only late ascertains, it must be one of the highest priorities in the current financial crisis to use regulation to regain trust in the financial sector. The effective regulation of rating agencies is an important step towards this goal.