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EU Council OKs proposals to reduce reliance on rating agencies

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  • EU Council OKs proposals to reduce reliance on rating agencies

EUROPE – The European Council has approved an amendment to the directive regulating credit rating agencies with the view to reducing occupational pension funds' "over-reliance" on external ratings.

The European Parliament already approved the new set of rules in January.

One of the measures adopted by the Council aims to amend current directives on the activities and supervision of institutions for occupational retirement provision (IORPs) on UCITS and alternative investment fund managers.

According to the Council, such measures will reduce IORPs' reliance on external credit ratings when assessing the creditworthiness of their assets.

Additionally, investors or issuers will be able to claim damages from a credit rating agency if they suffer a loss due to an infringement committed by the agency "intentionally or with gross negligence".

As previously approved by the Parliament, sovereign ratings will also have to be reviewed at least every six months as opposed to the current 12-month period.

The new rules also put a particular emphasis on the rating of structured finance products.

Issuers of such products with underlying re-securitised assets that pay agencies for their ratings will now have to switch to a different rating provider every four years.

However, mandatory rotation will not apply to small rating agencies, or to issuers employing at least four agencies each rating more than 10% of the total number of outstanding rated structured finance instruments.

The amended rules also seek to mitigate the risk of conflicts of interest by requiring rating agencies to disclose publicly if a shareholder with 5% or more of the capital or voting rights holds 5% or more of a rated entity.

The new regulation prohibits ownership of 5% or more of the capital or the voting rights in more than one agency, unless the agencies concerned belong to the same group.

At the time the European Parliament approved the new rules, Michel Barnier, commissioner for internal market and services at the European Commission, argued that the measures would increase competition in an industry dominated by a few market players.

"Credit rating agencies will have to be more transparent when rating sovereign states and will have to follow stricter rules, which will make them more accountable for mistakes in case of negligence or intent," he said.

"Furthermore, the new rules will reduce the over-reliance on ratings by financial market participants, eradicate conflicts of interest and establish a civil liability regime."

The Commission is now expected to release a report reviewing the situation in the credit rating market, and potentially to follow it up with a new round of legislative proposals, by 1 July 2016.

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