EUROPE – The European Parliament has approved new rules to regulate credit rating agencies, under which investors will be able to sue agencies found in breach of the legislation.

According to the European Commission, the new legislation – which comprises a regulation and a directive – will allow agencies to issue unsolicited sovereign debt ratings on set dates only, while agencies’ shareholdings in rated firms will be capped to reduce conflicts of interest.

The amendment comes shortly after the Parliament and the Council approved draft legislation last month.

Under the new rules, unsolicited sovereign ratings can be published no more than three times a year, on dates published by the rating agency at the end of the previous year.

These ratings could be published only after markets in the EU have closed and at least one hour before they reopen.

Additionally, in the case where a shareholder or member holding 10% of the voting rights in a ratings agency has invested in the same rated entity, the new legislation stipulates that the credit rating agency will have to refrain from issuing ratings, or disclose that its ratings may be affected.

The new rules will also bar anyone from simultaneously holding stakes of more than 5% in more than one credit rating agency, unless the agencies concerned belong to the same group.

Beyond that, the legislation aims to give investors who rely on a credit rating the option of suing an agency for damages if it breaches the rules set out in the new EU legislation either “intentionally” or by “gross negligence”.

Leonardo Domenici, the MEP who led work on the rules, said: “We are taking some steps forward with this new directive, fully in line with its basic spirit, which is to enable firms to do their own internal ratings.  

“These should provide viable, comparable and reliable alternatives to those of the rating oligopoly.”

Michel Barnier, commissioner for internal market and services at the European Commission, welcomed the parliamentary vote on the new rules.

“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.

“The new rules will contribute to increased competition in the rating industry dominated by a few market players.

“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.

“This matters because ratings have a direct impact on the financial markets and the wider economy and thus on the prosperity of European citizens.”