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BackOn Wednesday, 579 representatives of the European Parliament voted in favour of new rules for rating agencies. However, the voting result is a compromise solution, which was brokered in negotiations with the European Commission and European finance ministers at the end of November. However, for procedural reasons alone nobody can claim that the resolution has been able to write the final chapter.
At the beginning of this week, rating agencies once again drew attention to themselves. Fitch Ratings warned that it would drop the top rating of the United States. Crisis-ridden Spain did not escape Fitch’s warning either. The credit rating of the country is hanging in the balance, commented the rating agency. Parallel to the latest comments of the rating agencies, the European Parliament this week debated stricter rules, to enable it to improve its control in particular over the three Wall Street top dogs Fitch, Standard & Poor‘s and Moody’s, who together dominate incredible 96 % of the rating market.
During the financial crisis, the three major rating agencies came under particular criticism because of their careless handling of their seals of approval, their intransparent decision-making methods and because of their close involvement with powerful actors in the financial industry. However, by blindly trusting their judgements and even laying them down in binding regulations and laws, the industry, but also public decision makers have played their part in making these agencies so powerful.
New regulations in place…
Based on the adopted regulations, the European Union is introducing a rating calendar, a civil responsibility, apart from hoping to avoid possible conflicts of interest. Regulatory references to agencies shall be removed from Union law by 2020. In future, rating agencies will be held responsible for gross negligence, whereby a reversal of the burden of proof for investors and rated entities will apply; as will, in addition the jurisdiction in the country of the damaged party. In future, state ratings may only be published and revised on certain pre-fixed dates. However, a major point, the creation of an independent European agency, has been postponed to 2016. The proposal was not adequate, as it was not able to break the dominance of the three major rating agencies, said the SPD MEP Udo Bullmann.
…after long discussions
These measures have without a doubt improved the status quo. However, far stricter rules were advised by both Parliament and Commission at the beginning of the negotiations. The original ban of state ratings, originally announced by Commissioner Michel Barnier has completely disappeared. In addition, the proposal by the Commission had suggested that rated companies would be obliged to change their rating agency after a few years to prevent lock-in effects and to break up the oligopolistic market. In the report of the S&D MEP Leonardo Domenici, the Committee of the European Parliament also requested the prevention of fusions and takeovers by the three major rating agencies. These positions have survived the compromise either not or only in a much weakened form (for example the restriction of the commercial links of rating agencies to their owners has been hugely softened).
However the competent European Commissioner Barnier congratulated the European Parliament in spite of the watered down final result. This presents a great step towards more transparency. One had come a step closer to financial regulation and has drawn a consequence from the crisis, said Barnier.
Hence, the subject of rating agencies can by no means be concluded by this agreement; it is now the responsibility of the EU legislator to consequently remove any reference to agencies from existing laws to prevent banks and investment companies from blindly relying on the judgement of rating agencies, when they sell investment products. Both the creation of a European rating agency and the review of the current payment models will have to remain on the agenda.
During the financial crisis, the three major rating agencies came under particular criticism because of their careless handling of their seals of approval, their intransparent decision-making methods and because of their close involvement with powerful actors in the financial industry. However, by blindly trusting their judgements and even laying them down in binding regulations and laws, the industry, but also public decision makers have played their part in making these agencies so powerful.
New regulations in place…
Based on the adopted regulations, the European Union is introducing a rating calendar, a civil responsibility, apart from hoping to avoid possible conflicts of interest. Regulatory references to agencies shall be removed from Union law by 2020. In future, rating agencies will be held responsible for gross negligence, whereby a reversal of the burden of proof for investors and rated entities will apply; as will, in addition the jurisdiction in the country of the damaged party. In future, state ratings may only be published and revised on certain pre-fixed dates. However, a major point, the creation of an independent European agency, has been postponed to 2016. The proposal was not adequate, as it was not able to break the dominance of the three major rating agencies, said the SPD MEP Udo Bullmann.
…after long discussions
These measures have without a doubt improved the status quo. However, far stricter rules were advised by both Parliament and Commission at the beginning of the negotiations. The original ban of state ratings, originally announced by Commissioner Michel Barnier has completely disappeared. In addition, the proposal by the Commission had suggested that rated companies would be obliged to change their rating agency after a few years to prevent lock-in effects and to break up the oligopolistic market. In the report of the S&D MEP Leonardo Domenici, the Committee of the European Parliament also requested the prevention of fusions and takeovers by the three major rating agencies. These positions have survived the compromise either not or only in a much weakened form (for example the restriction of the commercial links of rating agencies to their owners has been hugely softened).
However the competent European Commissioner Barnier congratulated the European Parliament in spite of the watered down final result. This presents a great step towards more transparency. One had come a step closer to financial regulation and has drawn a consequence from the crisis, said Barnier.
Hence, the subject of rating agencies can by no means be concluded by this agreement; it is now the responsibility of the EU legislator to consequently remove any reference to agencies from existing laws to prevent banks and investment companies from blindly relying on the judgement of rating agencies, when they sell investment products. Both the creation of a European rating agency and the review of the current payment models will have to remain on the agenda.