In the aftermath of the financial crisis, the EU institutions reached, in a record time, a first-reading agreement on regulating credit rating agencies. In April 2009, the European Parliament endorsed the compromise deal and the Regulation has entered into force last September. However, some provisions will only apply from December 2010. Under the new regulation, credit-rating agencies face for the first time mandatory registration, with national authorities. National regulators are responsible for approving the request and supervising the agency’s activities as well as take decisions on withdrawing an agency's registration should the rules be breached. Moreover, all ratings issued for regulatory purposes outside the EU have to be approved by EU-registered agencies before they can be used by the endorsement and certification mechanisms.
According to the Government Impact Assessment of UK Statutory Instrument for credit rating agencies, from last March, the FSA has estimated the cost of the regulation of CRAs from June 2010 to January 2011 around £262,500 and annual costs around £450,000.
The credit rating agencies have been accused for aggravating market turmoil in the eurozone after downgrading the credit ratings of Portugal, Spain and Greece. According to Kay Swinburne, European Conservatives and Reformists group economic and monetary affairs coordinator the “Credit ratings agencies have made mistakes and should be subject to greater transparency,” but “(…) the EU seems determined to find scapegoats for the current crisis.” She stressed that “The problems in the Eurozone are predominantly as a result of poor fiscal policies of some EU governments, not because of the decisions of ratings agencies to downgrade them.”
The above-mentioned Regulation has been recently adopted and not all the provisions are yet applicable. Nevertheless, on 3 June, the European Commission put forward a proposal amending the regulation on credit rating agencies. The Commission has decided to revise the regulation “in order to introduce centralised oversight of credit rating agencies operating in the EU” and “increased transparency on the entities requesting the ratings so that all agencies have access to the same information.” The European Securities and Markets Authority (ESMA), the new European supervisory authority, whose legislation is still currently being negotiated, would take over from national authorities.
The European Commission’s proposal, from last September, establishing a European Securities and Markets Authority had already foreseen that ESMA would be responsible to register credit rating agencies.
The present proposal is also based on Article 114 TFEU (old article 95). This provision allows the Community to harmonise national laws to improve the functioning of the Internal Market.There are no specific legal basis for proposals to create community agencies. The ECJ has decided on the limits to the delegation of powers to agencies in the 1958 Meroni judgement. The Court set up a general principle “A delegating authority cannot confer upon the authority receiving the delegation powers different from those which it has itself received under the Treaty.” The Court also stated that the delegating authority “must take an express decision transferring” the powers. Moreover, according to the Court the discretionary delegation of powers to bodies which are not foreseen in the treaty would imply a wide margin of appreciation, replacing “the choices of the delegator by the choices of the delegate”, entailing, in this way, “an actual transfer of responsibility.” The Commission is delegating more powers to the ESAs than it has itself, expanding, in this way, the Community competence.
Measures proposed under Article 114 would have to be adopted by the Council and the European Parliament (ordinary legislative procedure) with QMV required at the Council. Therefore, the UK would not be able to veto them.
The Commission proposal eliminates the existing provisions conferring in national authorities supervisory competences over credit rating agencies.The ESMA would, therefore, replace national competent authorities, such as the FSA, in charge of the registration and supervision of credit rating agencies, including the European subsidiaries of CRAs such as Fitch, Moody's and Standard & Poor's. It would be also in charge of matters related to ratings issued by third countries' rating agencies that operate in the EU under the certification or endorsement mechanisms. Whereas under the current Regulation the competent authorities of Member States may establish cooperation agreements between the relevant competent authorities of third countries, under the draft proposal such competence will be transferred to ESMA.
The Commission’s proposal would create a new rule imposing disclosure requirements to issuers of structured finance instruments. They would be required to give the information that has been provided to the CRA they hired, for the purpose of rating structured finance instruments, to competing CRAs. Such information should be used just for rating purposes.
Moreover, subject to the Commission’s endorsement, ESMA would be empowered to propose draft technical standards on registration process, such as on the information that credit rating agencies must provide for the application for certification as well as the presentation of the information that must be disclosed by credit rating agencies.
The ESMA would be responsible for the registration and supervision of credit rating agencies, but not for the oversight of the users of credit ratings.The competent national authorities will continue responsible to supervise the use of credit ratings by financial institutions and other entities, such as credit institutions, insurance undertakings, investment firms.
Under the proposal ESMA may also delegate specific supervisory tasks to competent national authorities. In this case, ESMA will give instructions to the authority to which it has delegated a task.
The draft proposal would allow ESMA to require all necessary information from CRAs, financial market participants, as well as to start investigations into the potential breaches of the Regulation. Member States' authorities would be under an obligation to assist ESMA in enforcing such requests. National supervisory authorities must ensure that all necessary information is given to ESMA and are under the obligation to cooperate with it and provide assistance, particularly when ESMA is carrying out investigations and on site inspections.
ESMA would be provided with extensive supervisory powers including examining records and other materials, “requiring oral explanations, hearing a person, requiring records of telephone and data traffic” and to carried out on-site inspections.
Under the current regulation, Member States are required to lay down the rules on penalties applicable to infringements of the Regulation’s provisions. Under the draft proposal, ESMA would be able to propose to the Commission to impose “periodic penalty payments” in order to put an end to an infringement and to complete and correct information to be supplied to ESMA. Such penalty payments must be imposed for each day of delay and the amount “shall not exceed 5% of the average daily turnover in the preceding business year.”
Where provisions of the Regulation on credit rating agencies have been breached, intentionally or negligently, ESMA may propose fines to be adopted by the Commission in order to compel credit rating agencies to comply with the Regulation. The amount of the fines and procedural aspects related to them would be determined by a delegated act adopted by the Commission. But, “The amount of the fine shall not exceed 20% of the annual income or turnover of the credit rating agency of the preceding business year.” The Court of Justice has jurisdiction to review such decisions. Hence, Member States would only be allowed to lay down rules on penalties applicable to the infringement of the obligation of financial firms to use, for regulatory purposes, credit ratings issued by registered credit rating agencies.
Furthermore, where a credit rating agency has committed a breach of the Regulation, such as breaches related to conflicts of interest, to obstacles to the supervisory activities, or failure to disclosed information, ESMA may also adopt supervisory measures including temporary prohibition of the issuing of credit ratings with effect throughout the Union, the suspension of the use of the credit ratings concerned and withdrawal of the registration of a credit rating agency. Furthermore, it may refer matters for criminal prosecution to the national authorities.
Under the Draft proposal ESMA is required to hear the persons which are the subject of the proceedings, on the matters to which it has taken objection, before taken any of the above-mentioned decisions. However, such requirements will not apply in case of “urgent action (…) in order to prevent significant damage to the financial system” as the persons concerned may only be given the opportunity to be heard after ESMA has taken its decision. According to the Commission “The rights of defence of the persons concerned shall be fully respected in the proceedings” however whilst they would have access to ESMA's files, such right will not be extended “to confidential information and internal documents of ESMA."
The national supervisors may request ESMA to assess whether the conditions for withdrawal of a credit rating agency's registration are met as well as request the suspension of the use of ratings in case a credit rating agency is deemed to be in a serious breach of the Regulation. Nevertheless, national competent authorities would no longer have the power to take supervisory measures towards credit rating agencies where they breach the Regulation.
Consequently, as soon as ESMA has been established, the Member States competent authorities would no longer have competences and duties related to enforcement and supervisory activity in the field of credit rating agencies. According to Howard Wheeldon “The worst point about the current Barnier proposals though is that they will greatly increase the number of people and committees involved and that they will lack necessary flexibility.” He pointed out that “strengthen regulation of the rating agencies and others by all means but allow it to be done on its merits by individual national governments.”
The draft proposal would only apply after the draft regulation establishing ESMA has entered into force. The new rules are expected to come into force in 2011. This proposal is set to be adopted in record time, taking into account Merkel and Sakorzy requests for stricter regulation of credit rating agencies.
The European Commission has estimated the costs related to direct supervision of CRA according to three categories: the staff costs, the infrastructure costs and the operations costs. According to the Commission 50 CRAs will apply for registration and will, therefore, be supervised by the ESMA. The Commission has estimated the EMAS´s budget in the first three years of operation (2011, 2012, 213) around € 7508.4. The Commission has pointed out that fees charged to the credit rating agencies should covered the ESMA's expenditure necessary for the registration and supervision of CRAs. Thus, there will be further costs for the industry. The Commission will adopted a delegated act determining “the types of the fees, the matters for which fees are due and the amount of the fees” in 2011. Nevertheless, in 2011 resources for direct supervision of CRAs would be advanced by Member States (€1501,68) and Community contributions (€ 1001,12).
In the meantime Barroso has announced that the European Commission is considering creating a European rating agency. The Eurogroup chairman, Jean-Claude Juncker said "I would wish for a European ratings agency situated close to the European Central Bank, that would be very desirable (…)”
