European Union lawmakers voted to scrap most of a proposal to force businesses to rotate the credit-ratings company they hire to assess their debt, while backing tighter restrictions on sovereign-debt ratings.
The European Parliament’s economic and monetary affairs committee decided today in Brussels to scale back the proposed rotation requirement, so that it would apply only to securitizations and other kinds of so-called structured finance. The stance brings the Parliament’s position largely into line with that of EU national governments, which must also approve the new rules proposed by the region’s regulators last year.
The European Commission, the 27-nation EU’s regulatory arm, proposed the rotation rule as part of a draft law to toughen regulation of the ratings industry amid concerns that some of its decisions exacerbated the euro-area debt crisis. The commission said rotation would boost competition and solve potential conflicts of interest.
“The debt crisis in the euro zone has shown that credit rating agencies have gained too much influence,” Leonardo Domenici, the lawmaker leading work on the rules for the parliament said in an e-mail. “In reaction we have strengthened rules on sovereign-debt ratings and conflicts of interest.”
Under the commission’s original rotation proposal, companies would have been obliged to change the company that they pay to rate their credit every three years.
Lawmakers in the parliament voted to amend this so rotation for rating structured-finance products would be required every five years, with a partial exemption for those using more than two ratings companies. EU governments agreed to restrict forced rotation to so-called re-securitized debt.
Parliament and national governments must now begin discussions on a final compromise bill before the legislation can become law.
The assembly is already locked in negotiations with nations over another draft law to regulate bank-capital rules and banker bonuses. Eight meetings held between the two sides have so far failed to result in a deal on disputed points in that legislation.
On sovereign debt, the parliament’s amendments would require ratings companies to pick two or three dates a year for issuing assessments, with publication outside these dates subject to approval by the European Securities and Markets Authority.
Such ESMA approval would only be forthcoming in cases of “exceptional and unforeseen circumstances,” according to the amendment text.
Such a rule would be a mistake, Ashley Fox, the lawmaker leading work on the rules for the Parliament’s Conservative group, said in an interview.
“It will increase the power of rumors and ultimately cause instability,” he said. “It’s bad as a matter of principle, the principle of free speech. It’s also bad because it creates uncertainty.”
National governments have rejected imposing such curbs on sovereign-debt ratings in their discussions on the draft law.
Lawmakers also called for the EU to start its own public assessments of governments’ creditworthiness. Domenici withdrew earlier proposals for the EU to set up a so-called European Creditworthiness Authority to issue these ratings.
The assembly also called for ratings firms to give percentage probabilities of default.
“The idea to show rating results in figures, and not in letters, makes rating more rationale and efficient, which avoids psychologically driven decisions,” Sven Giegold, the lawmaker guiding work on the rules for the Parliament’s Green group, said in an interview before the vote.