European Scrutiny Committee Contents

16 Financial services



+ ADDs 1-2

COM(10) 289

Draft Regulation on amending Regulation (EC) No. 1060/2009 on credit rating agencies

Legal baseArticle 114 TFEU; co-decision; QMV
Document originated2 June 2010
Deposited in Parliament11 June 2010
DepartmentHM Treasury
Basis of considerationEM of 17 June 2010
Previous Committee ReportNone
To be discussed in CouncilNot known
Committee's assessmentLegally and politically important
Committee's decisionNot cleared, further information requested


16.1 The Credit Rating Agency Regulation, Regulation (EC) No 1060/2009, which came into force on 7 December 2009, established an EU wide regulatory regime for such agencies. The Regulation:

  • introduced a harmonised approach to the regulation of credit rating activities in the EU;
  • established a registration system for credit rating agencies;
  • required registered agencies to comply with various provisions relating to independence, conflicts of interest, employees and analysts, methodologies and models, outsourcing, and disclosure and presentation of information;
  • provided that specified financial institutions may only use credit ratings for regulatory purposes if they have been issued or endorsed by a registered credit rating agency or if issued by an overseas agency that has been certified in accordance with the Regulation;
  • stated, in a recital, that the current supervisory architecture should not be considered as the long-term solution for the oversight of credit rating agencies; and
  • requested the Commission to put forward by 1 July 2010 a report on supervisory and regulatory reform and any legislative proposal needed to tackle the shortcomings identified as regards supervisory coordination and cooperation arrangements.[64]

16.2 In its May 2009 Communication European financial supervision the Commission proposed a new regulatory and supervisory regime for financial services with a European Systemic Risk Council (subsequently named the European Systemic Risk Board) and a European System of Financial Supervisors, including three European Supervisory Authorities. It suggested the system should have a role in supervising credit rating agencies.

16.3 In September and October 2009 the Commission proposed legislation, which is nearing adoption, in relation to the relevant supervisory authority, the European Securities and Markets Authority and its role in relation to credit rating agencies.[65]

The document

16.4 The Commission has now proposed this draft amending Regulation in order to introduce centralised oversight of credit rating agencies. It provides for:

  • the European Securities and Markets Authority to assume general competence in matters relating to the registration and on-going supervision of registered credit rating agencies, as well as matters related to the endorsement of ratings issued by rating agencies established in third countries, or the certification of such agencies;
  • national competent authorities (the Financial Services Authority in the UK), which currently perform these functions, to retain some specific supervisory powers;
  • replacement, throughout the present Regulation, of any reference to competent authorities in charge of the registration and supervision of credit rating agencies by a reference to the European Securities and Markets Authority;
  • powers for the European Securities and Markets Authority to request information, to launch investigations and to perform on-site inspections;
  • alignment of the current Regulation with the current proposals for the Alternative Investment Fund Managers Directive,[66] with the objective of treating alternative investment funds in the same way as other EU financial institutions with regard to the use of credit ratings — meaning that the credit ratings used for regulatory purposes by alternative investment fund managers, including hedge fund managers and private equity managers, must be issued or endorsed by a credit rating agency registered under the Regulation, or issued by an agency certified under the Regulation; and
  • the issuer of a structured finance instrument, such as a credit institution or investment firm, to give access, upon request, to the information necessary for rating the structured finance instrument — so providing all other registered or certified credit rating agencies with access to the information they need to issue their own unsolicited ratings of the instrument, the Commission's intention being a more competitive ratings environment and a better deal for the investor who will be able to rely on more than one rating for the same instrument.

The Government's view

16.5 The Financial Secretary to the Treasury (Mr Mark Hoban) tells us that the Government is content in principle for the European Securities and Markets Authority to supervise credit rating agencies, provided that the authority ensures high quality supervision and is efficient and legal. However, he qualifies this comment by saying that:

  • as drafted the draft Regulation could give rise to problems of workability and effectiveness of supervision;
  • the powers proposed for the European Securities and Markets Authority appear very broad; and
  • the proposal implies significant and unmet ongoing costs for national authorities.

16.6 Expanding on the matter of costs the Minister says first that the Commission's impact assessment:

  • envisages that no additional administrative costs would be created as a result of the proposal;
  • claims, on the contrary, that an immediate consequence of the centralization of supervision for credit rating agencies is that the administrative burden would be reduced;
  • notes that the time for registration would be reduced from the current two to seven months to a maximum of 65 working days, implying a substantial reduction of costs for credit rating agencies as they would be able to start issuing credit ratings under the new regime earlier than under the old system; and
  • notes that, moreover, credit rating agencies would no longer have to deal with several supervisors and the number of reporting obligations and other contacts would be reduced, as agencies would have to deal with only one supervisor.

16.7 Turning to the costs of the European Securities and Markets Authority the Minister, noting that under the draft European Securities and Markets Authority Regulation the revenues of the authority would consist in particular of contributions from the national competent authorities, a subsidy of the EU and any fees paid to it in cases specified in relevant legislation, comments that:

  • the European Securities and Markets Authority's credit rating agencies oversight activity would be funded from its overall revenues, including proceeds from fees it charged from credit rating agencies;
  • it is unclear in the Commission's proposal how national competent authorities would be reimbursed and supervisory fees charged; and
  • the impact assessment acknowledges that there will be implications for the EU budget.

16.8 The Minister, noting that cost to each competent national authority would depend on the amount of delegation of tasks to national supervisors, comments that the Commission's impact assessment says that:

  • whilst competent authorities would not be responsible for the supervision of the credit rating agencies, they would nonetheless be expected to offer all necessary assistance to the European Securities and Markets Authority and fulfill tasks delegated by the authority; and
  • competent authorities would be entitled in some clearly defined circumstances to request the European Securities and Markets Authority to take a concrete enforcement action.

But he adds that the assessment does not attribute a cost to competent authorities.

16.9 The Minister tells us that, given the short period between the publication of the proposed Regulation and the first Council working group meeting (on 21 June 2010), a formal domestic consultation has not been possible and that the Treasury and the Financial Services Authority intend to convene a stakeholder group shortly to canvass views.


16.10 How the introduction of centralised oversight of credit rating agencies, under the aegis of the European Securities and Markets Authority, is to be arranged is important and we note the Government's cautious approach to the proposal and its planned consultations with a stakeholder group. So before considering the document further we should like to hear about:

  • first, the Government's further thoughts about the scope of the European Securities and Markets Authority's powers in the draft amending Regulation. In this regard we refer the Government to the Report of the previous Committee on draft legislation for the financial services sector,[67] in which it raised doubts over the legality of delegating broad executive powers to the European Supervision Authorities; and also to the Report of the Treasury Committee on European financial supervision[68] on the same point;
  • secondly, its attitude to significant and unmet ongoing costs for national authorities implicit in the proposal; and
  • thirdly, the outcome of its consultations.

Meanwhile the document remains under scrutiny.

64   (30168) 15661/08: see HC 19-ii (2008-09), chapter 1 (17 December 2008) and Stg Co Debs, European Committee B, 27 January 2009, cols 3-24. Back

65   (30954) 13654/09 (30955) 13656/09 (30956) 13657/09 (30957) 13658/09 and (31088) 15093/09: see HC 19-xxviii (2008-09), chapter 6 (21 October 2009), HC 19-xxx (2008-09), chapter 2 (4 November 2009, HC 5-i (2009-10), chapters 1 and 2 (19 November 2009 and HC Deb, 1 December 2009, cols 989-1030. Back

66   (30624) 9494/09 + ADDs 1-2 and (31089) 15162/09: see HC 19-xviii (2008-09), chapter 9 (3 June 2009), HC 19-xxii (2008-09), chapter 3 (1 July 2009), HC 5-vi (2009-10), chapter 2 (13 January 2010) and Stg Co Debs, European Committee B, 23 February 2010, cols. 3-28. Back

67   (30954) 13654/09: see HC 19-xxx (2008-09), chapter 2 (4 November 2009). Back

68   Sixteenth Report from the Treasury Committee, 2008-09, The Committee's Opinion on proposals for European financial supervision, HC 1088, paras 55-64.  Back

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