Brussels - The European Commission on Wednesday proposed tough rules designed to improve the functioning of credit rating agencies (CRAs), whose misjudgements were partly to blame for the global financial crisis.

The proposals, put together during the space of a year by European Internal Market Commissioner Charlie McCreevy, are designed to "restore market confidence" by imposing strict conditions on those agencies wishing to operate in the European Union.

CRAs play a key role in finance by assessing the likelihood that a company or government will not pay back its debt. The safest investments typically receive an AAA rating.

But their judgement has been found wanting of late.

US-based Lehman Brothers, for instance, still enjoyed a fairly positive A2 rating from many of the world's most influential CRAs just days before its huge exposure to the subprime mortgage crisis forced it to file for bankruptcy, on September 15.

"It would be unjust and insensitive to single out the rating agencies as the single cause for the financial turbulences, but they have played their part," McCreevy said as he unveiled his proposals.

The European Union's executive wants to avoid a repeat of such mistakes by ensuring that future ratings are "objective, independent and of the highest quality."

"On this issue we are adopting a leading role," McCreevy said.

"While we are setting standards for the EU we want these to become global standards and we will discuss them with our main international partners with that objective in mind," he said.

The role of CRAs is to be discussed at Saturday's financial summit in Washington, which will bring together leaders of the world's 20 leading economies.

If approved by member states and the European Parliament, CRAs operating in the EU will be placed under the control of European supervisors.

This will be done by forcing American companies like Moody's or Standard & Poor's to register subsidiaries in the EU.

However, McCreevy's decision to entrust national authorities with the role of supervising their operations has drawn criticism from some European lawmakers.

Since rating agencies operate across borders, "we should quickly establish EU-wide supervision," said Markus Ferber, a conservative MEP from Germany.

According to the commission's proposals, potential conflicts of interest deriving from the fact that agencies are paid by the banks whose debts they rate will be tackled by forbidding them to act as consultants.

Moreover, every agency will be required to appoint at least three independent directors tasked with ensuring that conflicts of interest are properly identified, managed and disclosed.

In order to improve the quality of their appraisals, CRAs will no longer be allowed to assess financial instruments if they do not have good enough information on which to base their ratings on.

CRAs will have to become more transparent by disclosing "the models, methodologies and key assumptions on which they base their ratings," a commission statement said.

McCreevy said the new rules were needed because the voluntary code of conduct that had been put in place for CRAs had turned out to be "a toothless tiger".

Wednesday's proposed EU regulation is one of a series being drafted by officials in Brussels in order to avoid future credit crunches. (dpa)