Europe: Commission adopts proposal for credit rating agency Regulation

The European Commission has adopted a proposal for a Regulation governing credit rating agencies (CRAs). The proposed Regulation sets out the following objectives (to quote directly from it):

• to ensure that credit rating agencies avoid conflicts of interest in the rating process or at least manage them adequately;
  
• to improve the quality of the methodologies used by credit rating agencies and the  quality of ratings;
  
• to increase transparency by setting disclosure obligations for credit rating agencies; 
  
• to ensure an efficient registration and surveillance framework, avoiding ‘forum shopping’ and regulatory arbitrage between EU jurisdictions. 

In order to achieve these objectives, the Regulation contains prescriptions with regard, inter alia, to CRAs internal governance and the appointment of non-executive directors. Of interest are the rules set out with regard to the operation of the board and the role of the non-executive director. These are found in Annex I (Independence and avoidance of conflicts of interest), Schedule A (organisational requirements), of the Regulation; to quote directly from this Schedule:

The administrative or supervisory board of a credit rating agency shall include at least three non-executive members who shall be are independent. The remuneration of the independent members of administrative or supervisory board shall not be linked to the business performance of the credit rating agency and shall be arranged so as to ensure the independence of their judgement. The term of office of the independent members of the administrative or supervisory board shall be for a pre-agreed fixed period not exceeding five years and shall not be renewable. The dismissal of independent members of the administrative or supervisory board shall only take place in case of misconduct or professional underperformance.

The majority of members of the administrative or supervisory board, including all independent members, shall have sufficient expertise in financial services. At least one independent member of this board should have in-depth knowledge and experience at a senior level of the structured credit and securitisation markets".

For further information see: FAQs | Proposal | Citizens' summary | Executive summary | Impact assessment | Earlier Commission publications |