Some agencies have been criticised for failing to warn investors about the risks involved with investing in securities backed by sub-prime mortgages.
The European Commission says the review will cover issues such as governance, the management of conflicts of interest, the resourcing of the agencies and ratings migration, focusing in particular on segments of the securitised mortgage asset and sub-prime market.
European Commission spokesperson Emilia Hinkkanen says: “Also of concern is the credit rating agencies’ timing of placing relevant securitisation issues ‘on watch’, taking into consideration the material market evidence of deterioration in the US sub-prime market since mid-2006. This review will be conducted in parallel with, and will be part of, CESR’s report on the industry and the review of the IOSCO Code.”
Ratings agencies Moody’s and S&P released statements saying they will cooperate with the European Commission’s investigation.
Moody’s senior managing director Frederic Drevon says: “Moody’s is committed to continuing the constructive dialogue it has had with the regulators and policy makers to enhance the overall understanding of the structured finance market, the various players in that sector, and the role of ratings and rating agencies in the market.”
S&P spokesperson Martin Wynn says: “ We are participating in the current review of structured finance credit rating, as announced by CESA.”
Hargreaves Lansdown investment manager Ben Yearsley says fund managers should do their own credit research rather than relying on credit ratings agencies for investment advice.
He says: “What’s it got to do with the European Union to investigate them? Fund managers are intelligent enough to decide for themselves whether something is a good idea or not.
“It sounds like they’re getting involved in things that really shouldn’t concern them.”