* Agencies must register to operate in European Union
* New law introduces direct supervision for first time
(Adds S&P reaction)
By Huw Jones
STRASBOURG, France, April 23 Credit rating
agencies will for the first time have to register and be
supervised to operate in the European Union under a law adopted
by the European Parliament on Thursday.
The move will affect the big three in particular -- Standard
& Poor's MHP.N, Moody's (MCO.N) and Fitch (LBCP.PA).
They have been criticised for being too slow to warn
investors of the risks in complex securitised products that have
become largely untradable in the credit crunch despite having
had high ratings.
"This is one of the tools to respond to the crisis," French
centre-right lawmaker Jean-Paul Gauzes said.
Parliament voted 569 in favour of the draft law, with 47
against and four abstentions.
Ambassadors from EU states had signed off on a joint deal on
Thursday morning agreed informally beforehand with parliament.
The G20 group of industrial and emerging market nations has
decided that credit rating agencies across the world should
register and be directly supervised if they want to offer
ratings to investors.
EU Internal Market Commissioner Charlie McCreevy penned the
law after accusing the agencies of failing to "sniff the rot" in
some securitised products in good time.
"With this regulation the EU is setting an example to be
followed and matched," McCreevy said in a statement.
"We expect the conduct of the credit rating agencies to be
significantly improved as a result of this regulation, with
clear benefits to the integrity and stability of the financial
markets," McCreevy said.
The agencies provide ratings on the creditworthiness of
companies and countries which investors use to make decisions.
Under the new rules, the Committee of European Securities
Regulators (CESR), made up of national securities markets
watchdogs, will be the first point of contact in the EU for
So-called colleges of supervisors will be set up for each
rating agency operating in the EU, comprised of supervisors from
all countries in which the company offers ratings.
"Formal oversight by securities regulators in the EU of
ratings firms' policies and processes - combined with the
ongoing intensive scrutiny of credit ratings by the market -
will mean more transparency and accountability for ratings
providers, and greater confidence in ratings," said S&P
President, Deven Sharma.
CONFLICTS OF INTEREST
The new rules aim to improve how ratings are arrived at and
deal with conflicts of interest, as agencies are paid by the
companies they rate.
Staff will be rotated at regular intervals to cover another
sector in order to avoid becoming too close to a particular
client, as clients pay agencies for ratings on their debt.
At least two board members of each agency must be
independent with their remuneration not based on the performance
of the ratings business. One of the members must also be an
expert in securitisation and structured finance.
Standard & Poor's and Moody's are U.S.-based but their
branches in the EU will have to endorse any ratings issued by
the U.S. parents that are offered in the 27-nation bloc.
The new rules take effect in 2010 and largely put into law a
voluntary code of conduct drawn up by global market regulators.
(Editing by Elaine Hardcastle)