EU to introduce legislation to oversee credit ratings agencies

EU finance ministers agreed to introduce legislation to oversee credit rating agencies after the US subprime crisis highlighted the industry's failures.

Mandatory rules will replace the voluntary self-regulatory code the industry has been following.

"We reached agreement on the principle of registration of ratings agencies, and secondly on the need to monitor ratings agencies," French Economy Minister Christine Lagarde told a news conference.

Three rating agencies, Standard & Poor's, Moody's and Fitch, dominate the sector and have a pervasive influence in investment decisions and in the level of asset write-downs by banks.

Yet the agencies have been widely criticised as too slow to warn investors about the risks in mortgage-backed structured products they had rated highly, but which became virtually untradeable as the US home loan crisis unfolded.

They have also been criticised by some for a perceived lack of independence. Agencies already register in the US since last October, bringing them formally under the supervision of the Securities and Exchange Commission.

Dutch Finance Minister Wouter Bos said the sector needed more transparency.

"Is there a need for further regulation and further control over what they are actually doing? I believe yes," Mr Bos told reporters as he arrived for the meeting.

"They were the source of this crisis and we should do something. It's a black box how these ratings come into existence; nobody knows why they are, what they are, and they have clearly failed over the past few years," Bos said. EU Internal Market Commissioner Charlie McCreevy, who has sole right to propose EU financial services legislation, will propose draft laws on the sector in October. The Committee of European Securities Regulators, made up of national market watchdogs from each of the 27 EU states, would be the registration and monitoring body, Mr McCreevy said.

The industry abides by a voluntary code of conduct introduced in 2005 and beefed up this year by the International Organisation of Securities Commissions (IOSCO).

"It's important that any new external oversight of rating agencies follows a globally coordinated approach in order to ensure consistency for investors and issuers operating in international markets," a spokesman for Standard & Poor's said. Fitch said a global approach was best but a coordinated pan-European framework was better than many country-specific regimes.

"Such an approach should focus on compliance with the IOSCO code of conduct, avoid a bevy of additional rules, and have an oversight body comprised of independent capital market regulators," said David Weinfurter, managing director of Fitch Ratings. Moody's said it looked forward to reviewing any European Commission proposals and would provide its views during the Commission's consultation period.