EU watchdog placed at the heart of credit rating agency supervision
The latest amendments to the rules regulating credit rating agencies (CRAs) were approved by Parliament on Wednesday. These changes were needed to effectively entrust ESMA with the direct supervision of the agencies. MEPs, with Member State support, empowered ESMA, rather than the Commission, to impose fines on CRAs.
European Securities and Markets Authority (ESMA) to directly supervise agencies by July 2011
ESMA empowered to make dawn raids, impose fines, and ensure agencies evaluate the accuracy of their past ratings
All credit rating agencies to be checked by July 2014
The amendments were approved with 611 votes in favour, 15 against and 26 abstentions.
The Commission's initial proposal argued that the Commission itself was best placed to impose fines, upon a recommendation from ESMA. However, the final text agreed in negotiations and approved by Parliament gives this role to ESMA. A range of fines, reflecting the type of infringement, the size of the CRA, and possible aggravating or attenuating conditions, is laid down in the rules. ESMA will be able to impose fines of up to 20% of a CRA's turnover for the previous year.
Stronger investigative powers
The new rules will allow ESMA to conduct "dawn raids" (unannounced checks), at the premises of a CRA. At Parliament's insistence, ESMA is also specifically responsible for ensuring that CRAs comply with their "back testing" obligation, a task that involves comparing performance predictions for a rated financial instrument with its actual performance. Finally, ESMA is given a mandate to carry out checks on all CRAs by 2014.
Competition, transparency and dependence issues
Parliament had initially pushed to facilitate access to information for CRAs wishing to produce unsolicited ratings on the grounds that this would increase competition, allow for more transparency and give investors more information on which to base their decisions. This idea was dropped because Member States were reluctant to accept it, but the text still asks the Commission to table legislative proposals to this end. This is set to become a key issue on which Parliament is expected to focus on when further changes to this regulation are hammered out in the latter part of 2011.
The Council will now need to officially approve the text adopted today. Parliament's Economic Affairs Committee has meanwhile begun working on the next financial supervision reform, and is to set out its priorities in a paper likely to be approved in February.