EU COMMISSIONER Charlie McCreevy plans to block some non-executive directors at credit rating agencies from earning share options to boost their pay, and to set strict time limits on their appointment.
The measures are part of a radical shake-up of regulation in the sector, which has been blamed for contributing to the collapse of the sub-prime mortgage market and the subsequent credit crunch.
Under a new regulatory proposal due to be published next month, Mr McCreevy will introduce mandatory regulation of credit ratings agencies for the first time in Europe.
The draft proposal will also introduce greater external oversight of credit ratings agencies through either an EU committee or agency, to ensure that agencies offer completely independent advice to clients on the financial products on which they offer opinions.
EU officials are concerned that agencies are paid by the firms whose creditworthiness they rate, a situation that can lead to a conflict of interest when they provide advice.
Many US mortgage-related structured products sank in value despite an initially high rating provided by credit ratings agencies. Officials believe these ratings may have helped to create the bubble in the sub-prime mortgage market that has led to the credit crunch.
Mr McCreevy is due to publish a regulatory proposal for credit rating agencies next month but, in an answer to a parliamentary question from Fianna Fáil MEP Eoin Ryan this week, he outlined several key elements of the tough new European regulation.
"Non-executive directors who are charged with overseeing the internal credit rating processes and standards should not be in receipt of share options because of the risk that they could motivate them to go for volume rather than accuracy," says Mr McCreevy in the answer provided under the European Parliament rules.
"I also believe that it is necessary that their term of office should be for a pre-fixed period and not be renewable."
It is understood that this controversial measure would affect all non-executive directors involved in the rating oversight committees within credit ratings agencies. Mr McCreevy is also proposing that non-executive directors' remuneration should be linked to the skills they contribute to the supervisory, quality, accuracy and integrity of the credit rating process, "not to the growth in earnings or share price of the credit rating agency."
If Mr McCreevy's proposal is accepted by member states and the European Parliament, it would replace the current system of self-regulation that exists for credit ratings agencies.
But there is strong opposition to the proposal from credit rating agencies, which argue they could face conflicting regulatory standards in different jurisdictions, and from other sections of the financial services industry that fear a trend toward over-regulation.
The Association of British Insurers said yesterday that, while agencies had not been blameless in the run-up the credit crunch, "we do not consider that their role should be over-emphasised". The association said regulatory authorities should ensure that information flowed properly from issuers to investors rather than regulation.
"We therefore do not support the regulatory proposals set out by the commission and believe that action should focus on more fundamental aspects," said the association, which warned that it could set a precedent and lead towards an EU "super-regulator."
However, Mr McCreevy is likely to receive support from MEPs in the economic and monetary affairs committee. Mr Ryan said he welcomed the new regulatory proposal.
"After the collapse of the sub-prime mortgage market in America, it is clear that one of the main reasons for the collapse was the fact that credit rating agencies gave banks a high approval rating when it was very clear by any objective standard that these financial institutions were involved in extremely high-risk lending," he said.
