On April 23, the European Commission announced that the European Parliament and the Council of the European Union have approved a new regulation on credit rating agencies (CRAs). The regulation will be directly applicable in EU member states. It will not require implementation by national legislation.
The regulation introduces a common regulatory regime across the EU for CRAs. It includes the following requirements:
- The Committee of European Securities Regulators will operate a registration process. Applications will be decided upon by the relevant securities regulators grouped into a college. (Colleges of regulators will also be involved in the day-to-day supervision of CRAs.)
- CRAs are not permitted to provide advisory services.
- CRAs are required to disclose the models, methodologies and key assumptions on which they base their ratings and to publish an annual transparency report.
- CRAs must create a department akin to internal audit to review the quality of their ratings.
- CRAs must differentiate the ratings of more complex products by adding a specific symbol.
- CRAs are to have at least two independent directors, at least one of whom must have expertise in securitization. Their remuneration must not be linked to the business performance of the rating agency. They must be appointed for a single term of office of no more than five years and the agency may only dismiss them for misconduct.
The requirements imposed on CRAs are largely based on the standards set out in a voluntary code of conduct for CRAs published by the International Organisation of Securities Commissions in 2004 and revised in May 2008.
The regulation will be directly applicable across the EU 20 days after it is published in the Official Journal of the European Union. There will be a six-month transition period before its provisions become fully effective.