Regulatory Evolution of the EU Credit Rating Agency Framework

The recent financial crisis has triggered considerable concerns about the activities of credit rating agencies (CRAs), which has led to a shift away from self-regulation based on voluntary compliance with the IOSCO Code to the implementation of a regulatory framework at EU level under the supervision of the European Securities and Markets Authority. Against the background of the role CRAs play in the financial market system and how they have failed to fulfil their intermediary function, this paper examines the main weaknesses attributed to the operation of CRAs before and during the financial crisis and assesses the EU’s regulatory response to these weaknesses. As the paper will elucidate, many of the major concerns identified have been addressed following consecutive regulatory amendments, albeit to differing degrees and levels of satisfaction, which in the future will require redress and further improvements to be implemented, including, but not limited to, the issuer-pays model, over-reliance on ratings, ratings shopping and private enforcement.