Tuesday, October 23, 2012

European Commission Adopts Regulation Allowing ESMA to Fine Credit Rating Agencies

The European Commission has adopted a regulation enabling the European Securities and Markets Authority (ESMA) to impose fines on credit rating agencies. The Delegated Regulation establishes the rules within which ESMA will operate when imposing fines on credit rating agencies when they breach EU legislation. In order to respond to the deficiencies in the credit rating sector which contributed to the financial crisis, a regulatory framework for credit rating agencies operating in the EU was established by legislation and ESMA was entrusted with oversight of the rating agencies. The Credit Rating Agency Regulation includes a full list of infringements that, if committed by a rating agency, may trigger fines, including conflicts of interest, obstacles to supervisory activities or non-disclosure of certain information.

ESMA is exclusively responsible for the registration and oversight of credit rating agencies in the European Union. In executing its oversight responsibilities, ESMA conducted two on-site inspections at the three largest registered create rating agencies. The first inspections were carried out in December 2011 and the findings were published last March, while a second on-site inspection was completed in September of 2012. The March report identified several shortcomings and areas for improvement which ESMA is now  following-up through risk mitigation plans for each individual rating agency. ESMA is examining evidence from the second round of  inspections.

In a significant decision that paves the way for cross-border harmonization and cooperation, the European Commission recently found that the US regulatory regime for credit rating agencies is equivalent to the US regime. The Commission said that the US framework for regulating credit rating agencies provides for equivalent protection in terms of integrity, transparency, good governance of credit rating agencies and reliability of the credit rating activities. Similarly, the Commission found that the Canadian and Australian regimes for credit rating agencies are also equivalent