EU to move towards regulating credit rating agencies

Caught up in the developing global credit crisis, the European Union is moving towards the regulation and registration of its credit rating agencies.
In a June 16, 2008 speech to the Inaugural Global Financial Services Centre Conference in Dublin, Charlie McCreevy, the European commissioner for internal market and services, called the current oversight structure for ratings agencies “a toothless wonder.”
McCreevy observed that in response to their role in legitimizing questionable securities, an important factor that contributed to the subprime mortgage fiasco in the United States, credit rating agencies have advocated strengthening the International Organization of Securities Commission (IOSCO) Code of Conduct, to which they are signatories.
The IOSCO published its Code of Conduct Fundamentals for Credit Rating Agencies (CRAs) in 2004. The organization describes these code fundamentals as “a global, converged view of specific mechanisms CRAs can use to protect their analytical independence, eliminate or manage conflicts of interest, and help ensure the confidentiality of certain types of information shared with them by issuers.”
McCreevy said the code, which CRAs have adopted as part of their own corporate structures, isn’t strong enough. Some further regulatory oversight is required, he added.
“The IOSCO Code of Conduct to which the ratings agencies have signed up has shown to be a toothless wonder,” McCreevy said in his speech. “The fact is that despite the checks on compliance with the IOSCO Code, no supervisor appears to have got as much of a sniff of the rot at the heart of the structured finance rating process before it all blew up.
“I am deeply skeptical that the appropriate response lies in building on and strengthening the IOSCO Code.”
Instead, McCreevy called on “well targeted and robust internal governance reforms” for credit rating agencies. This would include, he added, “registration, external oversight and much better internal governance.”
This would not, McCreevy cautioned, include regulatory endorsement or control of individual ratings or statistical modeling. “Regulators should not be in the business of opining on individual rating content,” he said.