Tough times in the EU for Moody’s and Standard & Poor’s. Up until now, the ratings agencies have been largely self-regulated under a voluntary code of conduct. But their role in the sub-prime crisis could cost them their independence. During the financial services conference on June 16 in Dublin, Ireland, the European Commissioner for Internal Markets, Charles McCreevy, pointed out that the current regulatory approach has proven to be a “toothless wonder.” There seems no doubt that in spite of the checks on compliance with the International Organization of Securities Commissions (IOSC) code, no supervisor appears to have seen the financial credit crisis coming.

The credit ratings industry has been criticized heavily for its role in the crisis because it failed to spot warning signs. As a consequence of the global credit crunch, some in the EU are questioning the objectivity of credit ratings agencies, which are often paid by debt issuers requesting ratings.

There is likely to be a push to ditch the IOSC code altogether in favor of stronger external oversight of the ratings agencies.

In this, the EU will be following the U.S.’s lead. Credit ratings agencies in the United States have to register with the Securities and Exchange Commission (SEC), which has proposed changes designed to increase the transparency of the credit rating process. The proposal of America’s securities regulator would bar the agencies from issuing ratings on structured products unless they have sufficient information about the underlying assets of those products.

Looking at another proposal, the SEC also intends to create labels to differentiate between complex asset-backed securities and more traditional corporate bonds. According to the SEC, it’s the complexity of the structured products themselves, combined with the lack of quality information about the underlying assets, that makes it exceptionally difficult for anyone to determine a credit rating at all.

In the following months, a regulatory solution at the European level will therefore be found. The measures will in particular hit credit ratings agencies, such as Moody’s, Standard & Poor’s, Fitch Ratings and Dominion. These four main ratings agencies are already subject to oversight by the Paris-based Committee of European Securities Regulators. These companies will be encouraged to modify their internal governance significantly in order to avoid conflicts of interest.

History shows that after each scandal — and the credit rating agencies’ non-performance in the sub-prime case is regarded as such — there comes a respective regulatory action. We have seen that with the lobbying industry and the Abramoff scandal. We also have seen it with the accounting industry in the Enron scandal.

Regardless of the exact means of implementation, the European Union, therefore, like the U.S., seems ready to clean up the financial markets.

Geiger is founder and managing partner of Alber & Geiger, a leading EU government relations law firm with offices in Brussels and Berlin. Before that, Geiger was head of the EU Law Center of Ernst & Young, and president and CEO of Cassidy & Associates Europe. He has written a handbook on lobbying the EU.