Angela
Eagle: I suspect that CESR would want oversight and an
overview of what applications were being made. As long as the process
is facilitated and does not cause undue delay, there is no problem with
it.
Mr.
George: May I ask the Minister what consideration her
Department gave to each of the four available options: doing nothing;
doing something but not much; doing quite a lot; and doing the real
McCoy and really regulating? Has she been involved in any of the
discussions and can she give us an indication of her
Department’s thinking? Perhaps she can give a little more
information than hitherto—if I can I tease
her.
Angela
Eagle: In the aftermath of the Enron affair, the role of
credit rating agencies and their established position in markets were
brought into question. That led to a range of work in different
contexts, not only in the US, but also in international organisations.
The affair flagged problems up, and I suspect that the events leading
up to the credit crunch and the awarding of triple A ratings to what
turned out to be, at least, illiquid bonds has flagged them up
again. My
right hon. Friend mentioned four options. There would probably not be
an international consensus on doing nothing. There is certainly work
and contemplation at different levels about how credit rating agencies
can be more transparent. At the same time, those who make investment
decisions have to be reminded that credit ratings should be only part
of their due diligence when they are deciding whether to buy particular
securities. Therefore, there is a range of
reassessment. ECOFIN
noted the existence of a registration system in the US, and the Council
asked the Commission to consider how an EU registration scheme could
work, which is partially why we came up with one. At the same time,
there is much work going on at G20 and international levels, as I have
tried to say this afternoon. It is important to ensure that what
happens at EU level is not out of kilter with ongoing international
work.
John
Hemming: I am slightly confused about how the liquidity of
a security applies to the credit rating.
Angela
Eagle: I was trying to avoid using the emotive phrase
“toxic assets”.
John
Hemming: That brings me to the underlying issue: the
nature of the instrument that is being traded. Have the Government
considered that the over-complexity of certain instruments guides us
towards making a mess of things? Perhaps we should look at the listing
regulations from the perspective of limiting the complexity of the
instruments.
Angela
Eagle: There are lessons to be learned, not only by the
Government and regulators, but by markets, regarding how they innovate
and create the derivatives and other securities that have led us into
these circumstances. The issues are being looked at in parallel, and
although this afternoon we are talking about credit rating agencies, I
hope that I have not given hon. Members the impression that they are
the fall guys. Following the credit crunch, that is not the only area
that is being looked at by international regulators, politicians and
those who seek to keep markets in order in the private or public
sphere. A range of other issues have to be looked at, and this is only
one of them. Even getting this 100 per cent. right would not solve all
the issues of policy and regulation that we need to look at, but it
would be helpful.
The
Chairman: Order. May I remind hon. Members that the
subject of this sitting is credit rating
agencies?
Mr.
Graham Brady (Altrincham and Sale, West) (Con): The
Minister spoke about the importance of not acting out of kilter with
other international bodies, yet we seem to be operating on an unusually
short time scale without the usual consultation. As far as I can tell,
the only reason that has been advanced for that is that the Czech
presidency would like to have this signed off by the time the
presidency reaches its end. Given that it is more important that we get
this right than that we do it by then end of the presidency, will the
Minister reflect on whether we might be wiser to take a little longer
over it, particularly in light of what the new United States
Administration might propose to
do?
Angela
Eagle: We have to remember that there are other national
structures that require the registration of credit rating agencies in
other jurisdictions, not least the US, as I mentioned earlier. It is
not necessarily a problem that the EU should seek to address at least
credit rating agencies, given the effect that their judgments can have
on markets that are registrable in EU territories. How they avoid
conflicts of interest, how they increase their transparency and how
they get paid for their services are all areas of crucial interest that
are being looked at carefully as part of the Financial Stability
Forum.
While those
areas have all been commented on, we are discussing a registration
process. That might give one a lever to require more transparency than
before regarding how credit rating agencies do their business, their
profitability, what they charge, including for their initial ratings,
and whether they keep an eye on ratings as securities mature. A range
of issues might be relevant, but requiring them to register is a
modest, basic first step to thinking about how they might be regulated
in the future. There is a question of the jurisdiction in which
regulation can properly be exercised for such global businesses. All
regulators and national jurisdictions, as well as the European
Commission, are wrestling with that at the
moment.
Mr.
Brady: That might be a modest first step. However, this
Committee has not heard—the European Scrutiny Committee had not
heard either—whether there is any reason for urgency,
particularly as the documents before us contain evidence that the
credit rating agencies themselves might already be starting to respond
to some of the concerns that have been raised about them. Might it not
be wiser to be prepared to risk taking six months rather than
three?
Angela
Eagle: There was great concern in the relevant ECOFIN
meetings about current market conditions and a keenness to get some
kind of registration structure in place. There is always a balance
between the speed of taking a decision and getting it right, especially
in the EU context. However, I hope that with the intensive discussions
and work, not only in COREPER working groups from the Council’s
point of view, but in the European Parliament, we can get that balance
right.
Mr.
Brady: May I follow the point made by my hon. Friend the
Member for South-West Hertfordshire about barriers to entry? I was
interested by the Minister’s reply that barriers to entry were
already high and that that was why there were three dominant players.
Does she agree that that might be a reason to tread warily in
introducing further barriers to entry, particularly as she also said
that there had been a loss of confidence in some of the existing
providers?
Angela
Eagle: I said not that barriers to entry were already
high, but that theory would suggest that they were, given that there
are so few dominant players in this market. It is difficult to opine
any more than that. There is a genuinely opaque feel to this industry.
Annual reports and profits are not really available. Much less
available is information on how individuals are remunerated for their
work. It might be in the public interest to have far more clarity and
transparency on such issues. I was merely invoking the theory to
suggest that when a global market is dominated by only three players,
barriers to entry are probably already very
high.
Mr.
Brady: I was merely suggesting that the Minister might be
right.
Angela
Eagle: I am glad that the hon. Gentleman has noticed the
theory and I take that as a
compliment.
Mr.
Gauke: I think that I must step in before my hon. Friend
the Member for Altrincham and Sale, West says anything else
rash. Does
the Minister think it appropriate that home state regulators, as
opposed to CESR, should have the principal role in regulating credit
rating agencies? If so,
why?
Angela
Eagle: There are certain home state regulators that have a
great deal more capacity to do the day-to-day work concerning the large
players than CESR has, not that I wish to insult it. It is not an
unknown in the EU for member state organisations to be asked to do
things on behalf of the EU as a whole. That is the case in this
instance.
Mr.
Gauke: I think that this will be my final question.
Article 17 relates to the withdrawal of registration. We have already
discussed the implications of article 4 at great length. If a home
state regulator working with CESR withdraws the registration of a
credit rating agency, it might have a significant impact on investment
firms, credit institutions and so on for the reasons that we have
debated. Will the Minister give some assurance about how article 17
will work? Following on from the comments made by the hon. Member for
Birmingham, Yardley, will there be transitional provisions to ensure
that EU credit institutions and investment firms do not suddenly find
themselves in a difficult
position?
Angela
Eagle: Clearly, it would be against the interests of
financial stability if registration were suddenly withdrawn within 24
hours with no notice. In any regulation that requires registration for
business to be done in a certain area, one has to have a proper and
appropriate process for the withdrawal of registration. I do not
anticipate there being a sudden withdrawal and I doubt that the
European Commission does either. I am sure that it will not happen with
a large organisation because that would destabilise markets, which is
the opposite of the aim of the
regulations. I
assure the hon. Gentleman that any such activity would be seen as the
very last resort. There would be a great deal of process to go through
before any such step was contemplated. It is important to realise that
given the implications that it would have for the business, there would
have to be a judicially robust way of doing it. I reassure him that the
idea of having a registration system is not to destabilise the markets
any further; it is the
opposite.
The
Chairman: Order. That brings us to the end of the time
allotted for
questions. Motion
made, and Question
proposed, That
the Committee takes note of European Union Document No. 15661/08, Draft
Regulation on Credit Rating Agencies, and endorses the Government's
approach.—(Angela
Eagle.) 5.30
pm
Mr.
Gauke: I think that that hour flew
by.
Mr.
George: Speak for yourself.
[Laughter.]
Mr.
Gauke: I am grateful for the Minister’s assistance
to the Committee. We have covered a fair amount of ground and I do not
intend to make a lengthy speech, although I suspect that the Committee
will be disappointed to hear that. I will make just a few
observations. In
her opening remarks and in response to some of the questions, the
Minister emphasised that the issue of credit rating agencies is
important. There is clearly widespread concern about some of their
failures and about conflicts of interest. There is a systemic risk of
too many financial institutions relying on ratings by credit rating
agencies—we all have to acknowledge that. There is a curious
paradox in that, presumably, the concerns of regulators as a whole are
to on the one hand increase confidence in credit rating agencies, and
on the other hand to reduce our dependency on them. There may be
occasions when those objectives are in conflict. None the less, we
recognise that there is a clear need to look again at credit rating
agencies. The problem
is a global one. I doubt that that observation divides the Committee;
we all recognise the truth of it. Some of the questions asked by my
hon. Friend the Member for Altrincham and Sale, West touched on the
relationship with the US. I believe that the Securities and Exchange
Commission has produced its own new regulations for credit rating
agencies. It is well worth flagging up the point that contradictions
between the two regimes could cause difficulties.
. My
next concern is that the EU is asserting itself as an institution in a
global debate that might best be conducted at the G20 level. At times,
the EU—the European Commission—struggles to find a role
for itself here. I briefly mentioned the registration process, and this
is an example of that process. Applications have to be made to CESR,
which then passes them on to the home state regulators that scrutinise
them and determine whether to grant them. That involvement may be
unnecessary. The Minister says that it is merely a procedural matter
and that perhaps only 10 days or so will be lost. I do not pretend that
it is earth shattering, but there seems to be a desire for EU
institutions to play a role when, on a practical level, that may not be
necessary or terribly helpful.
There is a
purely practical concern about the demarcation lines between what, for
example, the FSA and CESR are doing. If I can flag up an issue for the
Government in negotiations on the matter, it is the need for clear
demarcation lines as to who is doing what. The Minister was clear about
it being right for the home state regulators to take the principal role
in scrutinising the credit rating agencies, but we do not want
confusion between what CESR and the likes of the FSA are
doing. On
the subject of the EU’s role, I come back to article 4. As
originally drafted—I am grateful for confirmation that
improvements have been made—article 4 essentially bashed credit
rating agencies on the head, saying, “You must have a subsidiary
in the European Union. Branches are unacceptable. You must have a
presence.” The Minister may argue that it is a purely practical
point—it is easier to regulate subsidiaries than
branches—but it looks like a degree of protectionism. Even if in
practice it is not going to be a big deal, it is an unfortunate signal
for the European Commission to send
out. The
Prime Minister made a speech yesterday, not all of which I agreed
with—the idea of the current downturn as merely the birth pangs
of a new global world is unfortunate. However, his point about
resisting protectionism is absolutely right. It is important that
nation states and the European Union resist protectionism and do not
send out protectionist signals. The original draft of article 4 very
much does that. Practically, it would make things very difficult for
the City of London, which has prospered on globalisation, if it were
not able to trade in US bonds and so on. The fact that the Government
have made progress on that is to be welcomed, but it worries me that
the European Commission ever thought that the second element of article
4 was a good
idea. Subject
to those observations, the proposals are not especially objectionable.
I know that there is a practical point, but the credit rating agencies
say that it will make
no difference to their operations. If that is the case, perhaps little
will be achieved here and they are already adapting and changing,
recognising that new standards are required. However, we note the
concerns of the European Scrutiny Committee and share some of them. I
also observe that the process is being rushed and that we do not have
the UK Government’s impact assessment—there is a great
deal of haste. I can understand why the Government and the European
Union wish to address the matter quickly, but I share the concerns of
my hon. Friend the Member for Altrincham and Sale, West that it is
important to get this right. Subject to those points, we do not object
to the
regulation. 5.38
pm
| 
