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Daily Insurance Industry News
Thursday 18th of January 2018
November 16, 2011

Regulatory shake-up for credit rating agencies

by Gill Montia

Story link: Regulatory shake-up for credit rating agencies

The European Commission wants to see investors less dependent on credit rating agencies when making their decisions and has plans to toughen up regulation in the sector.

According to the Commission, recent events have highlighted the role the agencies play in today’s financial markets with the euro debt crisis in particular exposing certain weaknesses in regulation.

Internal Market Commissioner, Michel Barnier, therefore wants firms including Moody’s, Standard & Poor’s and Fitch to follow stricter rules, be more transparent about their ratings and be held accountable for their mistakes.

The Commissioner also wants to see increased competition in the sector.

The four main goals of the proposed draft directive and draft regulation are as follows:

1. To ensure that financial institutions do not blindly rely only on credit ratings for their investments.

2. More transparent and more frequent sovereign debt ratings, with ratings action published after the close of business and at least one hour before the opening of trading venues in the EU.

3. More diversity and stricter independence of credit rating agencies to eliminate conflicts of interest.

For example, a big shareholder of a credit rating agency should not simultaneously be a big shareholder in another credit rating agency.

The proposed new rules also mean two ratings from two different agencies would be required for complex structured finance instruments.

4. To make credit rating agencies more accountable for the ratings they provide.

For example, an agency would be liable where it infringes credit rating agency regulation, thereby causing damage to an investor relying on the rating.

The proposals are now on their way to the European Parliament and the Council, for negotiation and adoption.

 

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