Recent developments during the Euro debt crisis have highlighted the need for a revision on the regulatory framework of credit rating agencies (CRAs). Concerns have risen over the excessive trust put by financial institutions and institutional investors on external ratings instead of carrying an adequate risk assessment. For that purpose, the European Commission has launched a public consultation which will be open until 7 January 2011 in order to calibrate the scope and ambition of any possible future legislative initiative in the field of credit rating agencies.

On 7 December 2010, a new EU regulatory framework applicable to the credit rating sector will come into force. New rules will require credit rating agencies to comply with rules of conduct in order to minimise potential for conflicts of interest, ensure higher quality ratings and greater transparency of ratings and the rating process..

However, as the most recent developments on debt crisis have highlighted, there are still some questions over credit rating agencies still remain to be answered. This is the purpose of the Consultation on Credit Rating Agencies (CRAs) launched by the European Commission. Interested parties and stakeholders will be able to take part in the consultation and share their points of views and concerns until 7 January 2011.

Main elements of EC Consultation on Credit Rating Agencies (CRAs)

• Overreliance: The Commission asks which measures could reduce the possible overreliance on credit rating agencies reports and increase disclosure by issuers of structured finance instruments in order to allow investors to carry out their own additional due diligence on a well-informed basis.
• Improving sovereign debt rating: Given the importance of these ratings, it is essential that ratings of this asset class are timely and transparent. While the EU regulatory framework for credit ratings already contains measures on disclosure and transparency that apply to sovereign debt ratings, further measures could be considered to improve transparency, monitoring, methodology and the process of sovereign debt ratings in EU.
• Competition: Only a handful of big firms make up the CRA sector, and there are still high barriers to entry. This lack of competition could negatively impact the quality of credit ratings. The Commission therefore asks what options exist to increase diversity in this sector.
• Liability: the rules on whether and under which conditions civil liability claims by investors against credit rating agencies are possible currently vary greatly between Member States. The Commission asks whether there is a need to consider introducing a civil liability regime in the EU regulatory framework for CRAs.
• Conflicts of interest: The "issuer-pays" model, which is the prevailing one among CRAs, raises questions of conflict of interest. In this environment practices such as higher ratings than warranted in order to encourage the issuer to more business with them in future or "rating shopping", which is when an issuer chooses a CRA on the basis of its likely rating, could arrise. The Commission asks what evidence there is for such practices and whether alternative models would be possible.

On the basis of the replies to the consultation, the Commission will decide on the need for any measures in 2011.