Commission staff working document - Summary of the impact assessment - Accompanying document to the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 1060/2009 on credit rating agencies {COM(2010) 289 final} {SEC(2010) 678}
Date: 2010-06-02
Institutions: European Commission
Subjects: administrative transparency, consumer information, credit institution, economic recession, exchange of information, financial control, financial solvency, impact study, investment, operation of the Institutions, securities

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EUROPEAN COMMISSION 

Brussels, 2.6.2010 
SEC(2010) 679 

COMMISSION STAFF WORKING DOCUMENT 

SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying document to the 

Proposal for a  

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL  

amending Regulation (EC) No 1060/2009 on credit rating agencies 

{COM(2010) 289 final} 
{SEC(2010) 678} 

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1. 

PROBLEM DEFINITION 

An  essential  element  of  the  CRA  Regulation  is  the  introduction  of  an  external  oversight 
regime whereby European regulators will supervise the issuance of credit ratings by CRAs1. 
The CRA Regulation has introduced a system of supervision based on colleges of competent 
authorities  of  the  Member  States,  which  gives  the  possibility  to  all  concerned  competent 
authorities  to  participate  in  the  process  of  registration  and  supervision  of  a  credit  rating 
agency  or  a  group  of  CRAs;  although  the  final  decision  is  always  taken  by  the  competent 
authority  of  the  home  Member  State.  The  supervisory  framework  of  CRAs  was  one  of  the 
most  difficult  subjects  in  the  negotiations  between  the  Council  and  the  Parliament, 
successfully concluded on 23rd April 2009. The De Larosière report of March 2009 followed 
by the Commission Communication of 27th May 2009 opened at political level the possibility 
to create a Community Agency which would deal with issues beyond CRAs. The compromise 
solution  on  the  CRA  Regulation  envisaged  already  the  need  to  review  the  supervisory 
provisions of the Regulation taking into account the new developments at political level. The 
Commission proposal for a new supervisory structure in Europe establishing three European 
Supervisory  Authorities  has  changed  the  picture.  The  Council  agreed  in  December  2009  to 
entrust in principle the new ESMA with direct supervisory powers on CRAs2. 

However,  it  is  not  merely  political  sentiment  that  goes  in  favour  of  considering  more 
centralised EU oversight of CRAs. There are strong factual indications that such an approach 
would better correspond to the business specificities of this sector:  

(i) 

(ii) 

mobility of the rating service, which may be easily provided from varying locations 
(e.g. a  German  analyst operating in a London  office  of  a  French  CRA  producing  a 
rating on an Italian company);  

cross-border impact of ratings on users located beyond the geographical limits of a 
jurisdiction (e.g. ratings issued by a Japanese CRA may be used for calculating risk 
capital by banks in various Member States). 

The activity of CRAs is markedly different from the one of banks or insurance companies. It 
does  not  have  such  a  strong  territorial  attachment  (in  terms  of  physical  presence  or  capital 
engagement) and the impacts over a particular jurisdiction of events concerning a particular 
CRA can be much less discernible. 

Consequently,  and  though  the  supervisory  framework  currently  prescribed  by  the  CRA 
Regulation  has  not  been  put  in  place  yet,  it  is  already  possible  to  identify  certain 
shortcomings. Those deficiencies and their main consequences for CRAs and supervisors are: 

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The CRA Regulation replaced a previous policy approach in this respect, under which the CRAs were 
expected  to  incorporate  all  the  provisions  of  the  IOSCO  Code  into  their  codes  of  conduct.  However, 
that  self-regulatory  approach  did  not  deliver  on  expectations  as  it  had  been  followed  on  a  voluntary 
basis  by  CRAs,  which  were  often  taking  advantage  of  the  "comply  or  explain"  principle.  Under  that 
approach an in-depth, independent examination of the actual compliance was not possible. The start of 
the  financial  crisis  shed  light  on  significant  weaknesses  of  the  CRAs  in  their  internal  organisation, 
transparency and managing conflicts and thus prompted a new, more exacting EU policy in this matter.  
See Article 6(3) of the Presidency compromise on the ESMA Regulation (general approach) agreed by 
ECOFIN on 2 December 2009 http://register.consilium.europa.eu/pdf/en/09/st16/st16751-re01.en09.pdf  

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1.1.  Multiplicity of supervisors involved and risks of conflicts over competences  

The  complex  supervisory  framework,  involving  (i)  mandatory  close  co-operation  between 
competent authorities and (ii) actual use of supervisory and enforcement powers by only some 
of  them,  has  been  structured  in  that  way  to  ensure  that  interests  of  all  relevant  supervisors 
were well represented and taken into account by those taking the final decision. At the same 
time  it  had  to  take  into  account  the  specific  nature  of  the  rating  activity.  Consequently,  the 
division  lines  between  geographical  competences  of  supervisors  were  not  set  too  firmly, 
creating room for potential intra-EU disputes. Importantly, this policy choice implies that the 
CRAs would be faced with the duty to interact with several competent authorities in the same 
field. The main problem arising from this situation is the risk of conflicts over competences, 
which may lead to potential gaps (ineffective supervision); overlaps (inefficient supervision); 
or arbitrage/unlevel playing field. 

1.2. 

Risk  of  divergent  and  inconsistent  application  of  the  CRA  Regulation  in 
individual acts by competent authorities in the Member States  

Irrespective of several elements triggering close co-operation between individual supervisors 
(e.g.  work  in  colleges),  the  existing  model  for  CRA  supervision  is  ultimately  based  on  the 
exercise  of  supervisory  and  enforcement  powers  by  individual  regulators  in  the  Member 
States.  It  is  possible  for  the  competent  authority  of  the  home  Member  State  to  override  the 
views of its partners participating in the college. It is also possible for a competent authority 
of the host Member State to take an individual action, not approved by the relevant college. 
This can lead to divergent and inconsistent application of the CRA Regulation in individual 
acts by competent authorities in the Member States. 

1.3. 

Burdensome and time-consuming administrative process  

Dealing with several supervisory authorities across the EU would involve substantially higher 
compliance  costs  for  the  rating  agencies.  On  the  supervisors'  side,  the  demanding  co-
ordination  and  consultation  rules,  which  are  a  corollary  of  having  all  interested  authorities 
engaged  in  the  supervisory  and  enforcement  process,  are  expected  to  weigh  heavily  on  the 
ability of the EU supervisory framework to produce timely and efficient outcomes3.  

1.4. 

Risk  of  misaligned  incentives:  can  national  supervisors  cope  with  the  pan 
European dimension of CRAs? 

Competent authorities in the Member States may perceive the dimension of CRA supervision 
mainly from a national perspective missing a full picture of the global nature and impact of a 
CRA's  activity.  Especially  in  situations  where  the  main  impact  of  a  CRA  lies  outside  the 
Member State where it is registered, there is the risk that the home competent authority does 
not allocate sufficient resources for the supervision of this CRA. It could create conflicts that 
the  competent  home  supervisor,  which  is  used  to  being  responsible  for  its  home  financial 
market and accountable to its national political institutions, has to take the main responsibility 
for CRA activities with pan- European reach affecting primarily financial markets outside its 

3 

For example, in order to take a supervisory measure (like suspending the use of a rating), the competent 
authority of the home Member State may be expected to notify the college and the college facilitator, 
then consult the college on a proposed measure, and if no agreement can be reached consult the CESR, 
and  the  college  again.  Only  after  those  iterations  are  completed,  the  competent  authority  may  take  a 
decision. 

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home  jurisdiction.  This  inherent  conflict  may  necessitate  time  consuming  and  costly 
coordination/enforcement actions by ESMA and the Commission.  

2. 

SUBSIDIARITY AND PROPORTIONALITY 

The problems identified in section 1 cannot be effectively addressed at Member States level 
as they stem from existing EU legislation and can only be addressed through changes in EU 
legislation.  The  European  Commission  considers  that  the  solutions  proposed  respect  the 
principle  of  subsidiarity  and  proportionality,  given  the  specificities  of  the  credit  rating 
agency's sector.  

3. 

OBJECTIVES 

The  amendment  of  the  CRA  Regulation  aims  at: securing  effective  supervision  of  CRAs  in 
the  EU;  streamlining  the  supervisory  architecture  for  the  CRA  industry  and  ensuring  legal 
certainty  for  CRAs  and  market  participants.  At  operational  level  the  objectives  are  the 
following: (i) ensure a single point of contact and clear competences; (ii) ensure a consistent 
application; (iii) ensure efficiency gains and (iv) ensure better alignment of incentives for the 
supervisory authorities to cope with the pan European activity of supervised entities. 

4. 

POLICY OPTIONS 

With  the  intention  to  meet  the  objectives  set  out  in  the  previous  section,  the  Commission 
services have analysed different policy options: 

4.1. 

Option 1 - Status quo (current CRA Regulation)4 

This option would consist in maintaining the key elements of the current supervisory set-up, 
agreed in the course of the negotiation of the CRA Regulation.  

4.2. 

Option 2 - College structure and ESMA 

This  option  reflects  the  situation  that  the  ESMA  Regulation  is  adopted  as  proposed  by  the 
Commission on 23rd September 2009 and that the supervisory framework as provided by the 
current CRA Regulation is maintained. 

4.3. 

Option 3 - ESMA to assume direct oversight of groups of CRAs or all EU-based 
CRAs 

Under  this  option,  the  CRA  Regulation  would  be  revised  in  order  to  introduce  centralised 
oversight  of  credit  rating  agencies  operating  in  the  EU.  ESMA  would  assume  general 
competence  in  matters  relating  to  the  registration  and  on-going  supervision  of  registered 

4 

We  are  aware  that  this  option  which  reflects  the  supervisory  framework  under  the  current  CRA 
Regulation would not be realistic if ESMA enters into force as envisaged by beginning of 2011. In the 
latter  case,  ESMA  will  have  additional  powers  which  would  also  impact  on  its  role  regarding  the 
registration and supervision of CRAs. Nonetheless, we think it is important to refer to the current CRA 
Regulation as baseline scenario as the content of the future ESMA Regulation and in particular how the 
current CRA Regulation would be adapted to it are not (yet) fully clear. We describe under option 2 a 
possible scenario how the current CRA Regulation could function under the (future) ESMA framework. 

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credit  rating  agencies  as  well  as  matters  related  to  ratings  issued  by  rating  agencies 
established  in  third  countries  that  operate  in  the  EU  under  the  certification  or  endorsement 
regimes.  Those  responsibilities  would  involve  the  use  of  administrative  measures  and 
recommendations to the Commission on the use of sanctions on periodic penalty payments.  

Within this broad option we may distinguish two alternative scenarios.  

4.3.1.  Option 3a - CRAs (groups of CRAs) with legal presence in more than one Member 

State 

ESMA's authority would be limited to the supervision of CRAs (groups of CRAs) with legal 
presence in more than one Member State.  

4.3.2.  Option 3b - all EU-based CRAs 

Under  this  sub-Option,  ESMA  would  be  the  sole  supervisor  of  all  EU-based  CRAs. 
Moreover,  within  this  framework,  if  ESMA  were  to  assume  exclusive  supervisory  powers 
over CRAs, ESMA would be entrusted with an appropriate authority to investigate breaches 
of the legislation. In order for ESMA to fulfil its new supervisory powers concerning CRAs, it 
is  necessary  to  provide  for  sanctioning  powers.  However,  it  is  necessary  to  assess  whether 
sanctions  are  to  remain  in  the  remit  of  the  Member  States  or  whether  the  Commission  or 
ESMA  should  be  entrusted  with  the  sanctioning  power.  The  new  framework  should  aim  at 
ensuring a level playing field and a consistent application of sanctions within the EU. 

5. 

ANALYSING AND COMPARING THE OPTIONS  

The  different  options  are  assessed  against  the  criteria  of  single  point  of  contact  and  clear 
competences,  consistent  application,  efficiency  gains  and  adequacy  of  reach  of  the 
supervisory authority.  

In  view  of  the  conclusions  reached  in  the  impact  assessment,  the  European  Commission 
considers  it  appropriate  to  present  a  proposal  amending  the  Regulation  on  CRAs.  The 
proposal should aim at solving the problems identified in the impact assessment:  

–  by entrusting ESMA with exclusive oversight powers over CRAs. ESMA will be granted 
powers  to  request  information,  to  launch  investigations,  and  perform  on-site  inspections. 
Where necessary, ESMA might require assistance of national securities regulators in those 
supervisory  activities.  The  latter  may  also  be  delegated  specific  supervisory  tasks  (e.g. 
hearing  of  a  person,  carrying  out  on-site  inspections),  with  ESMA  retaining  overall 
responsibility for those activities. 

–  by entrusting the Commission, acting on ESMA's request, with sanctioning powers within 
a well defined framework to be developed by means of delegated acts. Sanctions, including 
fines  and  periodic  penalty  payments,  will  be  defined  in  such  a  way  to  provide  a 
proportionate  reaction  to  individual  breaches  and  to  create  a  deterrent  effect.  The 
Regulation will include a list of breaches of the provisions of the CRA Regulation that can 
be enforced by fines when the CRA acted intentionally or negligently.  

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6. 

ANALYSIS OF IMPACTS 

The impact assessment shows that the preferred options which best addresses the objectives 
set  for  this  Commission  initiative  are  the  direct  oversight  by  ESMA  of  all  EU-registered 
CRAs  and  the  centralisation  of  the  sanctioning  power  with  the  Commission,  acting  on  a 
recommendation by ESMA. 

Advantages 

Disadvantages 

1 

Streamlined  decision  making  process  – 
no conflicts over competence  

1 Need  to  build  oversight  capacity  from 

scratch 

2  No risk of  incoherent application of EU 

law across the Member States 

2 Local CRAs expected to deal with an EU-
level supervisor (no intermediate step) 

3  Clear  efficiency  gains  –  heavy  co-
ordination  procedures  are  avoided  and 
resources  and  expertise  are  pooled  in 
one organisation 

4 

Supervisor's  perspective,  capacity  and 
mandate  corresponds  to  the  EU-wide 
reach of main players 

5  Level  playing  field  for  the  deterrent 
effect  of  sanctions  and  fully  consistent 
application  of  sanctions  throughout  the 
EU 

As the current initiative aims to streamline supervision of credit rating agencies, its potential 
benefits  can  be  deduced  from  the  cost  implications  of  the  financial  crisis,  in  which  credit 
rating agencies played a non-negligible role. Even when attributing to credit rating agencies 
only a fraction of the direct and indirect losses caused by the crisis, the benefits of an effective 
and efficient supervisory system are vast. 

7. 

MONITORING AND EVALUATION 

The Commission is the guardian of the Treaty and therefore will monitor how the Regulation 
on CRAs is implemented by ESMA. The evaluation of the consequences of the application of 
the legislative measure could take place three years after the entry into force of the legislative 
measure in the form of a Commission report to the Council and the European Parliament.  

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