UPDATE 2-EU ministers seek tougher rating agency oversight

(Adds Moody's reaction)

By Huw Jones

BRUSSELS, July 8 (Reuters) - European Union finance ministers agreed to introduce legislation to oversee credit rating agencies after the U.S. subprime crisis highlighted the industry's failures.

Mandatory rules will replace the voluntary self-regulatory code the industry has been following.

"We reached agreement on the principle of registration of ratings agencies, and secondly on the need to monitor ratings agencies," French Economy Minister Christine Lagarde told a news conference on Tuesday.

Three rating agencies, Standard & Poor's (MHP.N), Moody's (MCO.N) and Fitch (LBCP.PA), dominate the sector and have a pervasive influence in investment decisions and in the level of asset writedowns by banks.

Yet the agencies have been widely criticised as too slow to warn investors about the risks in mortgage-backed structured products they had rated highly, but which became virtually untradeable as the U.S. home loan crisis unfolded.

They have also been criticised by some for a perceived lack of independence. A survey of investment professionals published on Monday by the Chartered Financial Analyst (CFA) Institute said 211 of 1,956 respondents had witnessed a rating agency change its rating in response to pressure from an investor, issuer or underwriter.

Agencies already register in the United States since last October, bringing them formally under the supervision of the Securities and Exchange Commission.

Dutch Finance Minister Wouter Bos said the sector needed more transparency.

"Is there a need for further regulation and further control over what they are actually doing? I believe yes," Bos told reporters as he arrived for the meeting.

"They were the source of this crisis and we should do something. It's a black box how these ratings come into existence; nobody knows why they are, what they are, and they have clearly failed over the past few years," Bos said.

GLOBAL APPROACH

EU Internal Market Commissioner Charlie McCreevy, who has sole right to propose EU financial services legislation, will propose draft laws on the sector in October.

The Committee of European Securities Regulators, made up of national market watchdogs from each of the 27 EU states, would be the registration and monitoring body, McCreevy said.

The industry abides by a voluntary code of conduct introduced in 2005 and beefed up this year by the International Organisation of Securities Commissions (IOSCO).

"It's important that any new external oversight of rating agencies follows a globally coordinated approach in order to ensure consistency for investors and issuers operating in international markets," a spokesman for Standard & Poor's said.

Fitch said a global approach was best but a coordinated pan-European framework was better than many country-specific regimes.

"Such an approach should focus on compliance with the IOSCO code of conduct, avoid a bevy of additional rules, and have an oversight body comprised of independent capital market regulators," said David Weinfurter, managing director of Fitch Ratings.

Moody's said it looked forward to reviewing any European Commission proposals and would provide its views during the Commission's consultation period.

McCreevy said a draft directive on rating agencies was likely, rather than bolting provisions onto a reform of EU banking capital rules to be unveiled in October, McCreevy said.

"Ratings are a global business and I will bear this in mind," McCreevy said.

British finance minister Alistair Darling said it was up to investors to make their own choices and over-regulation should be avoided.

McCreevy has described the IOSCO code as a "toothless wonder" that failed to "sniff the rot" in securitised products and IOSCO will make recommendations on better application of the code in September.

Tuesday's declaration means a speedy deal on a registration law is expected. EU states and the European Parliament will have the final say on McCreevy's draft. (Editing by Will Waterman and David Holmes)