Credit-ratings companies will face European Union curbs on how they update markets about the quality of government debt under plans approved by the bloc’s lawmakers today.
The measures, intended to make it less likely that ratings decisions roil markets, will also give investors the right to sue if they lose money because of poor quality or deliberately distorted credit assessments. European Parliament legislators, voting in Strasbourg, France, backed the plans in a compromise deal with the EU’s 27 governments, which must now rubber stamp the accord before it can take effect.
“The part of the new regulation that will affect us the most is the controls and constraints on sovereign ratings,” Ian Linnell, group analytical head at Fitch Ratings Ltd., said in a telephone interview on Jan. 11. Under the draft law, “both unsolicited and solicited ratings must be constrained by a calendar put in place the previous year,” he said.
French bonds and U.S. Treasuries both made gains after the countries were stripped of their AAA credit ratings, in a signal that downgrades may have little bearing on a nation’s borrowing costs. Still, some governments in the EU, including France and Germany, have called for tougher rules on ratings companies, saying their decisions risk harming the bloc’s fight against its fiscal crisis.
Under the EU plan, each credit ratings company would pick a maximum of three days a year when they would be allowed to publish so-called unsolicited assessments of governments’ creditworthiness.
“If the ratings agencies hadn’t made glaring errors and covered up for rather doubtful market practices, we wouldn’t have needed this initiative,” said Leonardo Domenici, an Italian member who steered the law through the EU’s Parliament in Strasbourg, France, and who held out the prospect of yet more European legislation in the field.
“This is just a stage,” Domenici said. “We do need to follow up and continue looking at other options.”
Unsolicited ratings are those that haven’t been requested and paid for by a client. Ratings companies will be able to issue such ratings outside of their three dates if they can justify it to regulators.
“The law does leave some freedom for us to publish ratings outside of the timetable, and, where appropriate, we will do just that,” Linnell said. “Quite rightly, investors expect our ratings to reflect all relevant information and we will not wait for our slot in the calendar when a significant credit event occurs.”
The draft law requires ratings companies to submit a 12-month calendar to regulators showing when they plan to publish solicited and unsolicited sovereign ratings. It also requires that such ratings are published on a Friday.
“Credit-rating agencies will have to be more transparent when rating sovereign states and will have to follow stricter rules, which will make them more accountable for mistakes in case of negligence or intent,” Michel Barnier, the EU’s financial services chief, said in a statement after the vote.
On legal liability, the draft law foresees that investors and credit issuers will be able to claim damages from a ratings company if they suffer losses because of malpractice or gross negligence in the drawing up of assessments.
France already has a similar liability rule targeted specifically at ratings companies, while other nations address the issue through general civil liability regimes.
Ratings companies “must be accountable,” Wolf Klinz, a lawmaker from the parliament’s Liberal group, said in an e-mailed statement.
At present, they “are able to escape from their responsibility by claiming that they just express opinions -- this is too easy,” Klinz said.
Parliament lawmakers voted to largely scrap proposals from Barnier to force businesses to rotate the ratings company they use to assess their debt, on concerns that the measure could raise companies’ funding costs.
Barnier had said that the measure was needed to boost competition for the so-called big three ratings companies, Fitch Ratings, Moody’s Investors Service Inc. and Standard & Poor’s.
The new rules should take effect by March, following final approval by governments, Stefaan De Rynck, a spokesman for Barnier, said in an e-mail.
“Moody’s will now focus on implementation of the regulation, however concerns remain about a number of untested policy measures that have been included” in the draft law, Daniel Piels, a spokesman for Moody’s in London, said in an interview.
The legislation is the EU’s third round of rule-making for ratings companies since the 2008 financial crisis.
“We intend to comply fully with the new rules,” Martin Winn, a spokesman for Standard & Poor’s in London, said in an e-mail. The company will “be working closely” with the European Securities and Markets Authority to implement the standards, Winn said.
Under the draft law, the EU plans to block any investor from owning stakes above 5 percent in more than one rating company. The law would also stop companies from giving rankings for debt issued by their shareholders, if the investors hold a stake of 10 percent or more in the ratings firm.
The parliament vote is in line with a political deal on the law reached in November by legislators and officials.
Credit ratings companies are “playing a prominent role in the current sovereign-debt crisis,” Sven Giegold, a lawmaker from the assembly’s Green group, said in an e-mailed statement.
Lawmakers would have liked the rules to be “more ambitious in terms of addressing the market power of the ‘big three’ agencies and potential conflicts of interest,” he said.