Presently, credit rating agencies are governed by the capital requirements and market abuse directives, as well as by a voluntary code of conduct laid down by the International Organisation of Securities Commissions (IOSCO), and are annually assessed by the Committee of European Securities Regulators (CESR). The Commission believes that self-regulation, based on voluntary compliance with the IOSCO code of conduct, is not adequate.

The Commission has, therefore, proposed that the current self-regulatory approach be replaced by a Regulation. Hence, on 12 November 2008, the European Commission adopted a proposal for a Regulation on credit rating agencies.

In a record time, the Czech EU presidency, the European Parliament representatives and the European Commission reached a first-reading agreement on regulating credit rating agencies based on Council’s general approach from last March and the outcome of the European Parliament’s Economic and Monetary Affairs Committee vote. On 23 April the European Parliament endorsed the first reading agreement approving tighter rules for rating agencies.

Under the new regulation credit-rating agencies will face for the first time mandatory registration. The Commission has proposed a single entry point for the registration, the Committee of European Securities Regulators (CESR) and the responsibility for registration and surveillance of the credit rating agency would rest with the competent authority of the home Member State, where the credit rating agency has its registered office. The European Parliament’s Economic and Monetary Affairs Committee has taken a tougher approach and has called for an increased role for the CESR in registering and supervising agencies, rather than allowing member states to have control over the process. According to the MEPs the Committee of European Securities Regulators (CESR) should be the only registration and supervisory body over European rating agencies and not national regulators as originally proposed.

Under the compromise deal credit ratings agencies would be registered by national authorities. In its current form, CESR has no legal powers to license agencies or issue sanctions if they breach the rules. Under the agreement, it will become “the single point of entry” for a credit ratings agency wishing to register in the EU but it will pass on all requests to national authorities. National regulators will be responsible for approving the request and supervising the agency’s activities. National authorities will also take the decision on withdrawing an agency's registration should the rules be breached.

 A college of supervisors will be set up to coordinate the exchange of information between national authorities and to improve coordination of their activities. The colleges of competent authorities would contribute to harmonised application of Regulation’s rules.

The de Larosière report supports the idea of a strengthened CESR to license and supervise agencies, and the Commission is to put forward an initial supervisory package based on the report, in May. The European Parliament called on the Commission to, by 1 July 2010, report on the reforms of the regulatory and supervisory model of the Community financial sector and to put forward any legislative proposal “needed to tackle the shortcomings identified as regards supervisory coordination and cooperation arrangements.” Hence, supervision will remain on national regulators until new European supervisory body is set up.

Under the draft regulation approved by the European Parliament all ratings issued outside the EU will have to be approved by EU-registered agencies before they can be used. The European Commission’s original proposal would have required ratings used in the EU to be actually done in the EU. This new provision is not so protectionist as the original version. The regulation will only apply to ratings issued for regulatory purposes. A specific regime of certification would be established for smaller credit rating agencies from third countries with no presence or affiliation in the Community. The Commission will verify, on a case by case basis, on the equivalence of the legal and supervisory framework of a third country to the requirements of this Regulation and therefore on the possible use of that rating within the Community.

Under the compromise deal in order to avoid conflict of interest between the agency issuing the rating and the rated organisation those analysts and persons approving credit ratings would be subject to a rotation mechanism. Agencies will have to publicly disclose the methodologies, models and key rating assumptions they use in their credit rating activities. Moreover, they will have to detail their ownership and management structure, as well as how they are complying with the EU rules.

Under the agreement, credit rating agencies should either use different rating categories when rating structured finance instruments or or provide additional risk information to subscribers.

Moreover, they will be forced to publish an annual transparency report. The proposal will create administrative costs for the CRAs, especially the compliance costs with transparency obligations such as the annual transparency report.

The ECOFIN will formally adopt the proposal at its next meeting. Following its publication in the Official Journal, the Regulation will be directly applicable in all Member States within 20 days. Member states will then have six months to implement the new provisions.