The European Commission is working a new regulation package that would seriously dent the European business of ratings agencies, according to a draft that was obtained this week by the Financial Times Deutschland.
According to the draft proposal drawn up by the EU commissioner for internal market and services, Michel Barnier, ratings agencies would be “temporarily prohibited” from issuing analysis on a country that is undergoing bail-outs.
The EC is also looking to force financial institutions in Europe to regularly change the ratings agency they are using, in an effort to spur competition and avoid conflict of interests. According to the draft, “the credits ratings agencies engaged should not be in place for more than three years or for more than a year if it rates more than ten consecutive rated debt instruments of the issuer”.
The agencies would have to take a four year break before being able to work for the same financial institution, which could separate the ratings agencies from stable business contracts and a steady flow of revenue.
Barnier wants to prop up the European Securities and Markets Authority (ESMA), which could “temporarily restrict the issuance of credit ratings in exceptional, precisely defined situations”.
The reform package also stipulates that ESMA will have to develop technical standards in order to harmonies ratings scales and the presentation of reports, which will also involve developing new rating methodologies or updating the current ones.