The new rules will contribute to increased competition in the rating industry dominated by a few market players. Furthermore, the new rules will reduce the over-reliance on ratings by financial market participants, eradicate conflicts of interest and establish a civil liability regime. This matters because ratings have a direct impact on the financial markets and the wider economy and thus on the prosperity of European citizens.
The main objectives of the new rules are following:
Reduce overreliance on credit ratings
In line with our G20 commitments, the new rules aim to reduce reliance on external ratings, requiring financial institutions to strengthen their own credit risk assessment and not to rely solely and mechanistically on external credit ratings. Also European Supervisory Authorities should avoid references to external credit ratings and will be required to review their rules and guidelines and where appropriate, remove credit ratings where they have the potential to create mechanistic effects.
Improve quality of ratings of sovereign debt of EU Member States
To avoid market disruption, rating agencies will set up a calendar indicating when they will rate Member States and which will be limited to three per year for unsolicited sovereign ratings. Deviations remain possible in exceptional circumstances and when appropriately explained. These ratings will only be published after the close of business and at least one hour before the opening of trading venues in the EU. Furthermore, investors and Member States will be informed of the underlying facts and assumptions on each rating which will facilitate a better understanding of credit ratings of Member States.
Make credit rating agencies more accountable for their actions
The new rules will make rating agencies more accountable for their actions as ratings are not just simple opinions. Therefore, the new rules ensure that a rating agency can be held liable in case it infringes intentionally or with gross negligence the CRA Regulation, thereby causing damage to an investor or an issuer.
Reduce conflicts of interests due to the issuer’s pays remuneration model
The Regulation will also improve independence of credit rating agencies to eliminate conflicts of interests by introducing a mandatory rotation for some complex structured finance instruments, the re-securitisation, and limitations to the shareholding of rating agencies. To mitigate the risk of conflicts of interest, the new rules will require CRAs to disclose publicly if a shareholder with 5 per cent or more of the capital or voting rights holds 5 per cent or more of a rated entity, and would prohibit a shareholder of a CRA with 10 per cent or more of the capital or voting rights from holding 10 per cent or more of a rated entity.
To ensure the diversity and independence of credit ratings and opinions, the proposal would prohibit ownership of 5 per cent or more of the capital or the voting rights in more than one CRA, unless the agencies concerned belong to the same group (cross-shareholding).
Publication of ratings on European Rating Platform
Furthermore, all available ratings will be published on a European Rating Platform which will improve comparability and visibility of all ratings for any financial instrument rated by rating agencies registered and authorised in the EU. This should also help investors to make their own credit risk assessment and contribute to more diversity in the rating industry.
As part of the package, the Commission will also review the situation in the rating market and report to the European Parliament and the Council with regard to the feasibility of creditworthiness assessments of sovereign debt of EU Member States and a European credit rating Foundation.
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