* EU urged to create credit rating agency
* Should be self-sufficient after start-up costs met
(Adds Hoban, S&P comment)
By Huw Jones
LONDON, Nov 19 (Reuters) - The European Union should create a credit rating agency to compete with the three global players that dominate the sector, a report by a senior EU lawmaker said on Friday.
"The recent financial crisis has highlighted that there are three key problems in the industry: lack of competition, over-reliance on external ratings in the regulatory framework, and no liability for ratings by credit rating agencies," the report said.
Authored by Wolf Klinz, a German Liberal member of the European Parliament's influential economic affairs committee, it calls for the creation of a fully independent European Credit Rating Foundation.
Users and issuers should pay start-up costs for the first three years, after which it would be self-sufficient, the report said. Credit rating agencies usually charge a fee to the borrowers they assess.
The report also wants public support to encourage local rating agencies to "move to a partnership structure or joint network" to compete with the global players.
Rating agencies "played a significant role in the build-up of the financial crisis due to faulty ratings given to structured finance instruments", the report said.
Policymakers say this unleashed a global chain reaction that ended with governments having to bail out lenders on both sides of the Atlantic, putting heavy strain on public finances.
Public backing to spur competition in the sector is likely to face opposition from Britain.
UK Financial Services Minister Mark Hoban told Britain's parliament on Tuesday: "I question whether taxpayers in Europe would feel it right that their money should be going to fund credit rating agencies."
The sector is dominated by the overwhelmingly American "Big Three" -- Standard & Poor's, Moody's and Fitch Ratings.
"We welcome competition that is fair, and investors should be free to determine which ratings are of value." a Standard & Poor's spokesman said.
Europe has long wanted a home-grown rival, and demands for one have become more urgent since downgrades of euro zone debt earlier this year that sparked anger among politicians.
The bloc has already approved a new law that forces agencies to register and undergo supervision, and the economic affairs committee will vote on further measures on Monday.
Klinz' report will be debated by the economic affairs committee next month. Although non-binding, it sends a clear signal of the sort of tough measures parliament will want included in legislation anticipated next year.
The EU's executive European Commission is consulting on a draft law it will propose in early 2011 to boost competition in the sector and dilute the role of ratings, which determine the size of capital buffers held by banks.
Parliament will have joint say with EU states on the final shape of the law and will want key elements in its report included in the planned measure.
The report says investors should not invest in structured products if they cannot assess the underlying risk themselves, otherwise they should apply the highest risk weighting to them.
The report calls for agencies to be exposed to civil liabilities in case of gross negligence in their ratings.