EU auditors say rating agencies could be better supervised

According to The European Court of Auditors tasked to examine European credit agencies, additional supervision and regulation is still needed in the wake of the 2008 financial crisis. The auditing bloc said that the European Securities and Markets Authority's supervision of the agencies since 2011 was "well established, but not fully effective."

"The report points out how rules and regulations have made the EU hostile for independent rating agencies."

"Credit ratings are important for investors and participants in the equity and bond markets, in some cases even replacing investors' due diligence," said Baudilio Tome Muguruza, lead author on the report. "But there is still room for improvement in the supervision of credit ratings agencies in the EU."

In particular, the report points out how rules and regulations have made the EU hostile for independent rating agencies and diminished their ability to compete with the "Big Three" of Experian, Transunion and Equifax. This is underscored by the fact that the "Eurosystem" — the combined entirety EU financial banking system — only accept ratings issued by four of the full 23 agencies authorized by ESMA.

The documentation and monitoring tools of the ESMA were declared to be "rather rudimentary" and additional emphasis on creating consistency and accountability was called for.

The report concludes with recommendations for the ESMA, including: 

  • Document its assessment of the requirements on credit rating methodologies during registration
  • Improve transparency and traceability of processes
  • Continuously update its supervisory manual and supervisory handbook
  • Work to better integrate IT solutions while making documentation web-friendly
  • Examine agencies' systems for dealing with conflicts of interest, in particular relating to their analysts' trading

For their part, the ESMA accepted the recommendations though cautioned that they lacked direct control over the Eurosystem.

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