Calls for these firms, long the whipping boy in many politicians’ eyes for the capital market’s problems over the last year, to be regulated have been growing in Europe for some time. Both Germany’s Angela Merkel and France’s Nicolas Sarkozy have supported the idea, and in recent weeks EU financial services commissioner, Charlie McCreevy has signaled the Commission’s intention to end self-regulation by the rating agencies. He is known to be solidly behind these proposals. Some EU finance ministers want national regulation, believing that it would be easier to manage, but the rating agencies themselves naturally want a consistent EU wide approach if regulation is to be forced upon them.
The move marks a departure from the self-regulation model currently in operation. Under this International Organization of Securities Commissions has a Credit Rating Agency code of conduct which the agencies comply with on a voluntary basis (IOSCO’s CRA task force has 19 strong list of recommendations for improving credit ratings).
But regulation is not without its problems. Firstly: who will be the regulator? And who will be responsible for oversight? The plan is understood to involve the suggestion of an intermediary body between the regulator and the agencies – akin to an IASB for the rating industry. But adding another layer of bureaucracy is not universally welcomed. “Isn’t that what IOSCO is supposed to do?” questions one participant.
Questions also remain as to how far regulation of the rating process can go. Will regulators have any involvement in determining rating methodology? If the industry goes down that road then the prospect of a single state-run rating agency – something unthinkable a year ago – cannot be far behind.
