Charlie McCreevy, the European Union internal market commissioner, on Tuesday warned the credit rating industry that it was “now on watch”, but he backed away from proposing a new regulatory framework for agencies.

The European Commission had been mulling a new law to regulate the credit rating sector, amid growing criticism of the agencies' performance in recent years. However, last week a European committee of national regulators urged the Commission to resist new legislation a piece of advice that Mr McCreevy said he would follow.

Borrowing the term used by rating agencies to alert investors to a possible deterioration in a company's credit standing, Mr McCreevy warned: “The rating agencies put issuers on watch. I want them to realise that it is they who are now on watch.” He said he would keep the matter under “continual review”, addin: “On balance, I incline to the view that regulation is not at this time appropriate.”

This means that for the near future, the sector will continue to abide by a voluntary code of conduct, rather than the potentially more stringent demands of full-blown regulations.

But Mr McCreevy coupled this message with criticism of the rating agencies, saying they had “not always covered themselves with glory whether in the general corporate or in the CDO [collateralised debt obligation] market”.

He said: “Given the oligopolistic structure of the industry and the question marks raised by industry performance of the past five years, the agencies must recognise that the concerns of investors who use their services are real.”

With the agencies' powers set to increase in the years ahead, “the avoidance of conflicts of interest and the availability of adequate levels of expertise to carry out their important work will become even more vital”.

Credit rating agencies monitor the credit backing of bond issuers and grade corporate and sovereign debt according to the likelihood of a default. The market is dominated by a small number of international agencies, such as Standard & Poor's, Moody's and Fitch.

The industry has drawn fire for failing to spot the impending collapse of companies such as Parmalat and Enron, but also for alleged conflicts of interests, because they are paid by the issuers whose debt they are supposed to monitor. Critics also point to the fact that rating agencies like accounting firms provide ancillary services to some companies they monitor.

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