IP/11/1355 Commission wants better quality credit ratings
MEMO/11/788: FAQ: legislative proposal on credit rating agencies (CRAs)
Internal Market Commissioner Michel Barnier said: "Ratings have a direct impact on the markets and the wider economy and thus on the prosperity of European citizens. They are not just simple opinions. And rating agencies have made serious mistakes in the past. 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.”
But the timing of changes to credit scores can also trigger a negative feedback loop for consumers. How can authorities or agencies themselves ensure that a situation is made worse when it doesn’t need to be? The ECRC encourages an open discussion on credit referencing agencies (positive and negative databases) in the realm of personal finances. Like Commissioner Barnier’s objective today, private borrowers would also like to see a reduced over-reliance on ratings and an improvement (or assurance) in the quality of the rating process. Ratings currently have a quasi-institutional role. There is an inconsistency in cracking down on the “macro” agencies while encouraging the creation of “micro” (private individual) rating agencies all over the world.
The Capital Requirements Directive IV already reduces the number of references to external ratings and require financial institutions to do their own due diligence, and following the November draft law, the EU is making similar changes with regard to rules relating to fund managers. When are credit referencing agencies also going to be required to disclose more and better information underlying their ratings (credit scores)
How about similar regulation of credit ratings for consumer? Let’s find the similarities and discuss it… Conduct of business: the existing Regulation requires CRAs to avoid conflicts of interests (for example, a rating analyst employed by a CRA should not rate an entity in which he/she has an ownership interest), to ensure the quality of ratings (for example, requiring the ongoing monitoring of credit ratings) and rating methodologies (which must be, inter alia, rigorous and systematic) and a high level of transparency (for example, every year, CRAs should publish a Transparency Report). Supervision: since July 2011, ESMA exercises exclusive supervisory powers over credit rating agencies registered in the EU and has comprehensive investigative powers including the possibility to demand any document or data, to summon and hear persons, to conduct on-site inspections and to impose administrative sanctions, fines and periodic penalty payments. This centralises and simplifies the supervision of CRAs at European level. Centralised supervision ensures a single point of contact for registered CRAs, significant efficiency gains due to a shorter and less complicated registration and supervisory process and a more consistent application of the rules for CRAs. CRAs are at present the only financial institutions which are directly supervised by a European supervisory authority.
More information: http://ec.europa.eu/internal_market/securities/agencies/index_en.htm