The European Commission called on Wednesday for a clampdown on credit rating agencies, proposing new rules for them in hope of helping restore confidence in shell-shocked financial markets. Leading rating agencies Moody's, Standard and Poor's and Fitch have come under fire for being too slow to alert investors to the dangers of investments based on US high-risk subprime home mortgage loans.
Publishing a series of proposals, the commission said that rating's agencies should be banned from doing consulting work over concerns about potential conflicts of interests. They would also be required to disclose how they make their ratings and would not be allowed to rate a security if they did not have sufficiently reliable information to do so properly.
Rating agencies would also have to have at least three independent directors on their boards whose pay is not tied to business performance, internal reviews of rating quality would be required and annual transparency reports would have to be published. In the wake of the current financial crisis, Europe has been eager to set the standard internationally for credit rating agencies with its plans to step up regulation.
"I want Europe to adopt a leading role in this area. Our proposal goes further than the rules which apply in other jurisdictions," said EU Internal Markets Commissioner Charlie McCreevy.
"These very exacting rules are necessary to restore the confidence of the market in the ratings business in the European Union," he added. The European Union has called for tougher rules for rating agencies to be one of the measures to be considered when leaders of the 20 biggest economic powers meet on Saturday in Washington.
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