Watchdogs to beef up rating agency code compliance

BRUSSELS, July 28 (Reuters) - Credit rating agencies may be inspected for compliance with a code of conduct aimed at making them more transparent and better at handling conflicts of interest, market regulators said on Monday.

Three rating agencies, Standard & Poor's (MHP.N), Moody's (MCO.N) and Fitch (LBCP.PA), dominate the sector and have a pervasive influence in investment decisions and in the level of asset writedowns by banks.

Agencies have abided by a voluntary industry code of conduct since 2005 and the International Organisation of Securities Commissions (IOSCO), which drew up the code, beefed it up this year.

On Monday, IOSCO put forward three options for tougher enforcement that includes inspections of agencies and exchanging information between regulators.

"IOSCO believes that, for the code of conduct to be effective, CRAs need to comply with the prescribed disclosures and regulators should take steps to determine the veracity of these disclosures," IOSCO said in a statement.

IOSCO is made up of national market watchdogs from over 100 countries, including the EU, Japan and the United States, and agrees to apply standards they adopt, such as the code.

EU Internal Market Commissioner Charlie McCreevy has called the code a "toothless wonder" and has decided to go a step further by proposing mandatory registration of rating agencies in the autumn, a step backed by the bloc's finance ministers.

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 a defaults in U.S. home loans unfolded.

They have also been criticised by some for a perceived lack of independence. A survey of investment professionals published this month by the Chartered Financial Analyst (CFA) Institute said 211 of 1,956 respondents had witnessed a rating agency change its rating in response to pressure from an investor, issuer or underwriter. (Reporting by Huw Jones, Editing by Jason Neely)