March 26 (Bloomberg) -- European Union finance ministers may scrap plans to force companies to rotate the credit-ratings companies they use on concerns that the measure may harm investor confidence and increase market volatility.
Denmark, which holds the rotating presidency of the EU, will seek an agreement by ministers this week on whether to delete the proposal, according to two people familiar with the matter who couldn’t be cited by name because the talks are private.
Michel Barnier, the region’s financial services chief, proposed the rotation rule last year as part of a draft law to toughen regulation of the industry amid concerns that some ratings decisions were unjustified and exacerbated the region’s fiscal crisis. While Barnier said rotation would boost competition and solve potential conflicts of interest facing credit-ratings companies, regulators have warned that the requirement may worsen the quality of ratings in the short term.
The U.K., Germany and Spain are among more than 10 EU nations in favor of removing the requirement from the law and possibly discussing it again when rivals to the so-called big three of Fitch Ratings Ltd., Moody’s Investors Service Inc. and Standard & Poor’s may have increased their market share and resources, according to one of the people.
Under Barnier’s plan, companies would be expected to change the company that they pay to rate their credit every three years. The time limit could be extended to six years if a business hires more than one ratings company.
Finance ministers will discuss the measure at an informal meeting in Copenhagen on March 30-31, the people said. They will also consider what regulation should be applied to credit-rating companies based outside the 27-nation EU.
A potential problem with Barnier’s plan is that very few ratings firms have the know-how to rate complex debt instruments, such as some structured products, said Karel Lannoo, chief executive officer of the Centre for European Policy Studies, a Brussels-based research institute.
When national regulators have imposed similar rules on audit companies the large firms have simply “carved up the market,” Lannoo said in an interview.
The draft law needs approval by national governments and by lawmakers in the European Parliament before it can take effect.
Preben Aamann, spokesman for Denmark’s EU presidency, said he expected the draft law on credit-ratings companies to be discussed at the finance ministers’ meeting. He declined to comment further. Chantal Hughes, spokeswoman for Barnier, declined to comment.
A spokesman for S&P in London declined to comment and Fitch Ratings in London declined to immediately comment. A spokesman for Moody’s in London couldn’t be immediately reached for comment.
Ministers at this week’s meetings will also discuss proposals being worked on by Barnier for winding down failing banks, said one of the people. Measures suggested by Barnier include writing down senior unsecured creditors of crisis-hit lenders.
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