The EC has proposed the new rules following accusations that rating agencies underestimated the risks of US sub-prime mortgages and complex structured credit products.
Under the new rules, rating agencies would have to provide an annual transparency report, disclose their rating models and methodologies and would be prohibited from providing advisory services.
The European Commission has also set out stricter rules for the boards of rating agencies and a new registration procedure which provides European regulators with greater supervision over their activities.
Shortcomings over the disclosure of potential conflicts of interest by rating agencies which earn consultancy fees from the bodies they are rating has put the industry under the spotlight in recent weeks.
CMS Cameron McKenna partner Paul Edmondson says: “There has been much finger-pointing at agencies’ involvement in the collapse of portfolios and financial institutions investing or trading in collateralised debt obligations but they have infrequently appeared in fallout litigation. Regulation will assist in defining their responsibility and expose them to regulatory processes and investigation.”