Credit rating agencies will be subject to tough European regulations and supervision for the first time, under proposals put forward on Wednesday.

The new rules would require leading agencies, such as Moody's, Standard & Poor's and Fitch, that operate in Europe to register with a central supervisor, explain how they assess the quality of a company's assets and avoid any conflict of interest.

Charlie McCreevy, the Internal Market Commissioner, who has drafted the legislation, has been one of the agencies' sternest critics. Yesterday, he dismissed the industry's voluntary code of practice as “a toothless tiger” and said that the regulatory package, which has been drafted over the past year, was the toughest in the world.

He said: “I want Europe to adopt a leading role in this area. Our proposal goes further than the rules which apply in other jurisdictions. These very exacting rules are necessary to restore the confidence of the market in the ratings business.”

Pressure to legislate in Europe grew last year after the agencies were criticised for underestimating the risk of structured credit products, especially sub-prime mortgages, failing to adapt when market conditions deteriorated and being paid by the very companies whose creditworthiness they rate.

President Sarkozy of France and Angela Merkel, the German Chancellor, have been equally critical. Last Friday, Mr Sarkozy chaired an informal summit of European Union leaders, which agreed that “all financial players of systemic importance, such as rating agencies or geared funds” would have to be “subject to rules or at least to oversight, wherever they operate”.

There are also investigations in the United States into the agencies' activities. The matter may be raised this weekend in Washington at the summit that will begin to put in place a new international financial order.

In Britain, the Local Government Association has called for an inquiry into the role that credit agencies played in reassuring local authorities to place huge funds in Icelandic banks that subsequently failed. Mr McCreevy, who said that the agencies had led a “charmed existence”, predicted that the new rules, which must be approved by EU governments and by the European Parliament, could be in place within a year.

If the package is approved, every rating agency based in Europe would have to register with the Committee of European Securities Regulators in Paris. They would be supervised by the national regulator of the country in which their European headquarters is located.

The agencies would no longer be able to claim that the ratings they issue, and which are used by credit institutions, investment firms and insurance companies, are “just opinions”, Mr McCreevy said, pointing out that a licence could be lost for any violations.

The new rules would ban the agencies from continuing the practice of providing consultancy services as well. Each agency would have to appoint three independent directors to its board and disclose its method of assessing ratings.

A spokesman for Moody's said: “We believe any regulatory oversight in the EU should protect the independence of credit opinions, permit sufficient flexibility to adapt to market changes and promote regulatory consistency across the globe.”

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