In 2009, the European Parliament and the Council adopted a regulation on Credit Rating Agencies and some provisions only became applicable in December 2010. Nevertheless, last June, the European Commission put forward a proposal amending the regulation on credit rating agencies. The Commission has decided to revise the regulation “in order to introduce centralised oversight of credit rating agencies operating in the EU.” Hence, the European Securities and Markets Authority (ESMA), the new European supervisory authority would take over from national authorities. In fact, the draft regulation provides very broad powers for the ESMA.
There is no specific legal basis for proposals to create community agencies. Consequently, the present proposal is based on Article 114 TFEU, which allows the Community to harmonise national laws to improve the functioning of the Internal Market. Measures proposed under this provision would have to be adopted by the Council and the European Parliament (ordinary legislative procedure) with QMV required at the Council. Taking into account Merkel and Sakorzy’s request for stricter regulation of credit rating agencies, the present proposal is to be adopted in record time. In fact, the European Parliament and the Council have already reached an agreement on the draft regulation on credit rating agencies, which the European Parliament endorsed on 15 December. The Council is expected to formally adopt the text at an upcoming meeting.
From July 2011, the new Authority will directly supervise agencies operating inside the EU. Consequently theMember States’ competent authorities would no longer have competences and duties related to enforcement and supervisory activity in the field of credit rating agencies.
The proposal eliminates the existing provisions conferring on national authorities supervisory competences over credit rating agencies. The ESMA would, therefore, replace national competent authorities, such as the FSA, in charge of the registration and supervision of credit rating agencies, including the European subsidiaries of CRAs. It would also be in charge of matters related to ratings issued by third countries’ rating agencies that operate in the EU under the certification or endorsement mechanisms. Whereas under the current regulation the competent authorities of Member States may establish cooperation agreements with third countries. Under the draft proposal, such a competence will be transferred to the new Authority.
Moreover, subject to the Commission’s endorsement, the new Authority would be empowered to propose draft technical standards on the registration process, such as on the information that credit rating agencies must provide for the application for certification as well as the presentation of the information that must be disclosed by credit rating agencies. The draft regulation will create a new rule imposing disclosure requirements to issuers of structured finance instruments.
The new Authority will be allowed to require all necessary information from CRAs, financial market participants, as well as to start investigations into the potential breaches of the regulation. National supervisory authorities would be required to ensure that all necessary information is given to ESMA and are under the obligation to provide assistance, particularly when ESMA is carrying out investigations and on-site inspections.
The new Authority would be provided with extensive supervisory powers including examining records and other materials, “requiring oral explanations, hearing a person, requiring records of telephone and data traffic” and to conduct on-site inspections “at the business premises of the legal persons.” The European Parliament was able to amend this provision so that ESMA will be allowed to carry out the on-site inspection without prior announcement at the premises of a CRA. At least, the compromise deal provides that if under national rules authorisation from a judicial authority is required for records of telephone and data traffic or for on-site inspection, such authorisation shall be applied for.
Under the current regulation, Member States are required to lay down the rules on penalties applicable to infringements of the regulation’s provisions. Under the Commission’s draft proposal, ESMA would have been able to propose to the Commission the imposition of “periodic penalty payments” in order to put an end to an infringement and to complete and correct information to be supplied to ESMA. However, at the European Parliament’s request the proposal has been amended so that the new Authority has the power to fine credit-rating agencies itself. Hence, under the final text agreed in trialogue meetings, ESMA would have the right to impose fines on agencies in case of breaches of the present regulation. The draft regulation provides for a range of fines according the type of infringement. But, “the amount of the fine shall not exceed 20% of the annual turnover of the credit rating agency concerned in the preceding business year.” Moreover, the new Authority will also be able to impose periodic penalty payments in order to put an end to an infringement. The new draft text provides that “the amount of the periodic penalty payments shall be 3% of the average daily turnover in the preceding business year or, in case of natural persons, 2% of the average daily income in the preceding calendar year.” The Court of Justice has the jurisdiction to review such decisions.
Furthermore, where a credit rating agency has committed a breach of the regulation, such as breaches related to obstacles to the supervisory activities, or failure to disclosed information, ESMA may also adopt supervisory measures including the suspension of the use of the credit ratings concerned and withdrawal of the registration of a credit rating agency. It may also refer matters for criminal prosecution to the national authorities.
The national supervisors may request ESMA to assess whether the conditions for withdrawal of a credit rating agency’s registration are met as well as request the suspension of the use of ratings in case a credit rating agency is deemed to be in a serious breach of the regulation. Nevertheless, national competent authorities would no longer have the power to take supervisory measures towards credit rating agencies where they breach the regulation.
The Commission has estimated the ESMA´s budget in the first three years of operation (2011 – 2013) around €7508.4 and it has pointed out that fees charged to the credit rating agencies shcould covered the ESMA’s expenditure necessary for the registration and supervision of CRAs. The Commission will adopted a delegated act determining “the types of the fees, the matters for which fees are due and the amount of the fees” in 2011. Nevertheless, in 2011, resources for direct supervision of CRAs would be advanced by Member States (€1501,68) and Community contributions (€1001,12). The Financial Secretary to the Treasury, Mark Hoban, has said to the European Scrutiny Committee “the proposal implies significant and unmet ongoing costs for national authorities.” Under the proposal ESMA may also delegate specific supervisory tasks to competent national authorities. In this case, ESMA will give instructions to the authority to which it has delegated a task. At the UK request the compromise text states that ESMA has to reimburse “competent authorities in respect of any costs they may incur carrying out work under this regulation, in particular as a result of a delegation of tasks.”