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Labour warns over credit rating agency rules

Shadow Treasury financial secretary Chris Leslie is warning new regulation intended to reduce reliance on credit ratings agencies could fortify the position of the big three agencies unless more firms enter the market.

European Commission proposals for the new rules known as Credit Rating Agencies 3 include requirements for firms to rotate the agencies they use every three years or if they make more than 10 consecutive ratings on the same issuance.

Speaking to Money Marketing, Leslie says: “Rotation is a good idea if there are enough players in the market. The key thing is to break long-term relationships between firms and agencies. But with so few agencies, rotation risks actually entrenching relationships between firms and the big agencies by requiring them to be serviced by them for want of enough alternatives.”

“The Government should press for the directive to make sure firms use smaller agencies or for some other mechanism to help build that diversity of provision.”

The European Council is where the UK Government works to influence European policy and along with the European parliament it is yet to publish its response to the Commission’s proposals. Treasury sources say the most recent position in the Council is that the rotation policy would only apply to structured financial products. Once all three bodies publish their positions they will have to enter negotiations to hammer out final rules.

A Treasury spokesman says: “The Government is in favour of further reform which reduces over reliance on CRA ratings, increases transparency and fosters competition by reducing barriers to entry rather than through interventionist measures. We believe such reforms will improve the quality of all classes of ratings: sovereign, structured finance, and corporate.”

The Commission also proposed requiring institutional investors to do their own due diligence and for the European Securities and Markets Authority to approve methodologies used by agencies in their ratings.

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. I’m certainly no fan of the credit rating agencies. They are incompetent and borderline criminal with their conflict-of-interest (issuer pays) laden business models. But government control or heavy-handed oversight is certainly not the way to go. In fact, government regulations empowered the credit rating agencies by requiring institutions, such as banks, to invest only in debt securities that were rated by one of the agencies. We don’t need more government in this mess, but less. Remove the regulations, such as regulations mentioned in this article related to Solvency II and CRD, and let the market decide whether to use the credit rating agencies or not.

    I talk about the failure of the credit rating agencies and government regulations in my book “Jackass Investing.” I’m pleased to provide readers with a complimentary link to the two chapters dealing with this (Myth #13: It’s Best to Follow Expert Advice and Myth #14: Government Regulations Protect investors):
    http://bit.ly/ugSnBf
    http://bit.ly/tGoIJ1

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