EU to tighten screws on ratings agencies

The European Union plans to tighten the screws on rating agencies in a raft of new proposals including judicial action, issued amid concern over Standard and Poor's erroneous downgrade of France. Dubbing the S&P mistake "serious", the EU's internal markets commissioner Michel Barnier said the incident underlined "that in the current tense and volatile market situation, market players must exercise discipline and demonstrate a special sense of responsibility." Barnier, who has been highly critical of agencies downgrading weaker eurozone members during Europe's debt crisis, said he was specially surprised by an error at "one of the biggest ratings agencies, which as such has a particular responsibility. The event, he added, strengthened his conviction of the need for tighter rules across Europe, with proposed legislation to be unveiled in Brussels on Tuesday. Barnier said in a statement that his proposals would touch on four areas -- reducing reliance on ratings, increasing competition, increasing transparency in sovereign debt ratings, and toughening liability in case of misconduct. As far as this week's S&P error on France was concerned, Europe's fledgling financial watchdog, the 2011-born European Securities and Markets Authority (ESMA) will "establish the facts ... draw conclusions" with French authorities, Barnier said. S&P said that due to a technical error it had mistakenly announced to some of its clients that it had downgraded France's top "AAA" credit rating. France, which is fighting hard to retain its top rating in the face of pressure on its debt bonds, has reacted angrily, reinforcing wide criticism of the three big agencies, S&P, Moody's and Fitch. Scrutiny of the ratings agencies has been bolstered across the 27-nation EU through this year's setting up of ESMA, which requires them to register and sets rules for more transparency as well as wielding the threat of sanctions in case they violate the rules. ESMA, which has registerd a couple of dozen operators to date, currently can withdraw an agency's licence, order criminal action or slap fines amounting to up to 20 percent of annual takings. Barnier wants to toughen sanctions "creating a European framework for civil liability in the case of serious misconduct or gross negligence." Because rules differ across the union, the new proposals would enable any EU state or investor to demand damages before a civil court for losses liable to a credit rating agency. The proposals will also seek to whittle away the role of the agencies by urging banks and other financial institutions to do their own credit rating homework rather than systematically calling on the agencies. They will also reduce reliance on ratings agencies by demanding a yearly "rotation" in contracts, a source close to the proposals said. While Barnier's spokeswoman Chantal Hughes confirmed that the EU had given up any idea of creating its own agency "at this stage", she said "we will propose specific measures to promote competition and diversity." This could include for example the publication of an EU ratings index giving all ratings on a country by all agencies, including small and nascent companies, a source said.