BRUSSELS – European Union countries and the bloc's parliament agreed on Tuesday to introduce limited controls on credit ratings agencies after their judgment was called into question in the debt crisis.
Michel Barnier, the European commissioner in charge of regulation who helped broker a deal on the new law, said it aimed to reduce the over-reliance on ratings and establish a civil liability regime.
The new rules should make it easier to sue the agencies if they are judged to have made errors when, for example, ranking the creditworthiness of debt.
The agencies came under fire for giving top-notch AAA credit scores to debt that later unraveled and they provoked more criticism by downgrading countries at sensitive moments of the crisis.
"Credit rating agencies will have to be more transparent when rating sovereign states, respect timing rules on sovereign ratings and justify the timing of publication of unsolicited ratings of sovereign debt," Barnier said in a statement.
"They will have to follow stricter rules which will make them more accountable for mistakes in case of negligence or intent."
Others said the limited reform would do little to alter the agencies' behavior.
"This reform is no big breakthrough in changing the rating agency market," said Sven Giegold, a German member of parliament who was involved in the negotiations. "It's a step towards better supervision but there are no big structural changes."
Banks currently rely on the credit ratings of assets, such as packages of loans, to decide how risky they are and how much capital should be set aside to cover this risk. The reform is designed to weaken these connections.
The deal between the EU parliament and countries attempts to inject momentum into a regulatory drive to change the way the big three credit rating agencies - Fitch, Moody's, and Standard & Poor's - work.
But the law has been softened during negotiations.
"I think that the significance of this reform is limited because the political ambition has been scaled back," said Nicolas Veron of Brussels-based think tank Bruegel.
"In any event, the behavior of rating agencies such as we saw with U.S. securitized products before the crisis has changed."
Under the law, the agencies will set up a calendar indicating when they will rate countries, publishing ratings only after close of business and at least one hour before the opening of trading in the EU.
All ratings will be published on a European platform to improve visibility.
The EU's executive said that the new rules ensured that a rating agency could be held liable in cases of negligence or intent that damaged an investor. The rules will also encourage competition by introducing rules to rotate agencies although these will be limited to complex structured finance instruments.
An earlier idea for temporary "blackouts" on some sovereign ratings when bailouts are being organized for them was dropped.
A proposal to force debt issuers, such as companies, to rotate the agency they use to rank their bonds was also weakened. It will now apply only to resecuritised debt, a market that is largely dead.
Rating agencies are already subject to stricter policing, since the establishment of ESMA as their chief European supervisor.
A spokesman for Standard & Poor's said it would work with regulators to implement the rules when they are introduced, which one EU official said would be as soon as next year.
The reform follows a recent landmark judgment by Australia's Federal court that Standard & Poor's misled investors by giving its highest rating to derivatives that lost almost all their value in the run-up to the 2008 global economic crisis.
The Australian case marked the first time a ratings agency had faced trial over the complex financial products and could set a precedent for future litigation.
(Reporting by John O'Donnell; editing by Robert Woodward)