Debt rating agencies reject EU regulation plan

By Huw Jones

BRUSSELS, Sept 8 (Reuters) - Credit rating agencies (CRAs), banks and brokerages have rejected plans by the European Union for a mandatory shake-up of the sector aimed at helping restore investor confidence damaged by the credit crunch.

Ratings agency Standard & Poor's (S&P) (MHP.N) said on Monday an existing voluntary global approach drawn up by the International Organisation of Securities Commissions (IOSCO) was still preferable.

"If the proposals were implemented, CRAs such as S&P would face a situation in which regulators outside the EU would continue to expect them to comply with the IOSCO code while regulators within the EU would compel them to comply with new and EU-specific standards," S&P said.

S&P, Moody's (MCO.N) and Fitch (LBCP.PA) have been widely criticised as slow to warn investors about risks in securitised products they rated.

Despite high ratings, the products became untradeable when U.S. home loans underpinning them went unpaid, forcing banks holding them on their books to write down over $400 billion.

The EU's draft law would replace a voluntary code of conduct drawn up by IOSCO, which is made up of more than 100 national market watchdogs from Europe, the United States and Asia. The plan would force agencies to register if they wanted to operate in the EU, thereby bringing them under direct supervision.

EU Internal Market Commissioner Charlie McCreevy published a draft law in July for consultation, saying the agencies had failed to "sniff the rot" in securitised products.

DRAFT MEASURE

Agencies are paid by the companies whose debt or products they rate, a situation that makes McCreevy uneasy. His draft goes much further than a registration system introduced in the United States last October.

Under the U.S. system, an agency which runs foul of the rules would be deregistered but could still operate, whereas in the EU it would face a ban or criminal sanctions for breaches.

"The impracticability of such proposals is evidenced by the provisions requiring ratings, in certain circumstances, to be 'withdrawn' from use in Europe whilst continuing to be permitted in markets outside Europe," S&P said.

Agencies may have to set up shop within the EU to operate there and the draft regulation would also intrude too much into how agencies are run and non-executive directors are paid, S&P said.

Moody's said changes were needed to the Commission's proposal "to ensure it does not impair the efficient workings of the European and global capital markets".

The Securities Industry and Financial Markets Association, (SIFMA) which represents brokers and banks, said it wanted a less cumbersome approach.