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The European Union’s markets watchdog has tightened up its rules around credit-rating agencies in what could be a significant move for the UK once it leaves the bloc.

The Paris-based European Securities and Markets Authority, which directly supervises ratings agencies, said on Tuesday that it would toughen up the procedure for allowing ratings that come from outside the EU.

The vast majority of ratings used by European issuers are undertaken by agencies headquartered in countries beyond the bloc — particularly those based in the United States — that are deemed to have “equivalent” regulations to those in the EU.

Those ratings are then “endorsed” by a local outpost of the agency. That essentially gives the rating an EU imprimatur.

Under the new proposals, ESMA will no longer automatically accept this seal-of-approval. Instead, the local EU outpost of an agency will have to prove to the watchdog that the conduct of the overseas parent meets EU requirements. ESMA is also able to ask the outpost for more information about the parent.

Currently, the UK is the European hub for the big three rating agencies — Standard & Poor’s, Moody’s, and Fitch, who together employ about 1,400 people generating £600m of revenues. That is about 93 per cent of overall European revenues.

With Brexit talks looming, whether to grant the UK equivalent regulatory status for sectors including financial services will be a key bargaining chip.

“The need to update the current guidelines provides ESMA with the opportunity to reassess its approach to endorsement more broadly,” said Steve Maijoor, ESMA’s chair. “In light of this extensive reliance on credit ratings produced in third countries, it is not only important that the third-country regulatory and supervisory framework meets a minimum standard, but also that we have assurance that the third-country CRA meets the requirements in practice and on an ongoing basis.”

The regulation of rating agencies, which grade the creditworthiness of companies and countries, shot up the political agenda after 2008 because of the agencies’ perceived failure to anticipate deep problems in the banking system and elsewhere.

Unlike other parts of the financial-services sector, credit-ratings agencies are directly overseen by ESMA with no supervision done on a country-by-country basis.

That leaves open the question of who will supervise the agencies in the UK after Brexit.

Copyright The Financial Times Limited 2017. All rights reserved.
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