RICS plays a vital role, in that Lendy only uses RICS-registered valuers for its property valuations, which provides peace of mind for investors, as all of our properties are independently assessed. For further information please read Valuation Oversight by RICS, a feature specially commissioned by Lendy
Valuation oversight by RICS
Luay Al-Khatib, Director of Regulation EMEA at Royal Institution of Chartered Surveyors (RICS), explains the importance of valuation standards, and its work to ensure the profession complies with the necessary standards
As a professional service that underpins confidence in investment markets, globally, valuation matters. Asset values take centre stage in any financial account, whether they relate to real estate, capital equipment, intellectual property or financial assets.
This is why significant effort has gone into developing an internationally agreed set of valuation principles and definitions, through the International Valuation Standards (IVS), which is now in its fourth decade, and increasingly recognised by governments and leading institutions around the world.
At RICS we have been at the forefront of international standards development for over four decades, and we are committed to embedding IVS as a single, consistent valuation standard, worldwide. As the leading global professional body for valuers we require the members of our profession, whatever sector or part of the world they operate in, to comply with IVS through our own mandatory standards framework. RICS Valuation - Professional Standards (commonly known as the 'Red Book') is issued by RICS as part of our commitment to promote and support high standards in valuation delivery worldwide. The publication details mandatory practices for RICS members undertaking valuation services. It also offers a useful reference resource for valuation users and other stakeholders.
Holding the profession to account
Without effective oversight, standards are no more than words on a page, with the risk they may be ignored by advisers and their clients. For this reason, RICS holds registered practitioners and firms to account through our system of professional regulation, operating under independently led governance. RICS has operated a mandatory valuer registration and monitoring programme (VR) to support consistent application of Red Book valuation standards by members of the profession, worldwide. Introduced in 2011 in the UK, VR is now mandatory for RICS members in most countries around the world with some 16,000 registered valuers worldwide.
Together, the twin arms of The Red Book and VR aim to raise confidence in, and provide assurance to clients that a valuation provided by an RICS qualified valuer, or regulated firm anywhere in the world will be undertaken to the established international benchmark. Respectively, the standard and regulatory underpinning build trust in the profession - by maintaining a global framework of technical and professional standards rigorously enforced through a regulatory compliance monitoring regime and discipline.
Calling on a multi-disciplinary team, including specialist reviewers, the VR review programme has monitored the work of thousands of valuers, through detailed file review and audit, to check compliance with the Red Book. VR also checks firms’ systems and controls under which valuations are produced. The core monitoring programme is supported by the wider RICS team, responsible for training, standards development and, where it is needed, disciplinary action.
RICS role is to uphold standards in the public interest, not to supplant the courts or other established dispute resolution mechanisms. With this in mind our process does not normally second guess the accuracy of a valuation, but rather checks appropriate competence for the task, adherence to process and that appropriate professional due diligence has been observed. That said, all RICS regulated firms are required by RICS to have adequate professional indemnity and a transparent complaint handling procedure, with the avenue to refer unresolved complaints to appropriate independent dispute resolution mechanism.
Over the years RICS has refined its risk-based approach that was adopted with better use of information and intelligence held by RICS to target the review programme. This means visits are focussed where a significant risk had been identified through intelligence or thematic monitoring. The results over the eight-year active review programme have shown continual improvement. By 2017 the results showed the percentage of firms where we have required compliance improvements sitting at 15%, alongside 3% of firms inspected presenting failings where critical non-compliance was apparent.
A range of disciplinary outcomes are applied for those firms or individual members that present significant and serious failings. These range from consent orders (a commitment to an agreed set of improvement measures, such as attendance at a disciplinary workshop) through to referral to a disciplinary panel with accompanying sanctions and publication.
Our specialist VR review team often encourage valuers and their clients to think about compliance under the following headings:
- Create an audit trail in every file to support the valuation.
- Create a key stage file checklist to ensure the content is complete.
- Ensure documents comply with Red Book mandatory content requirements.
- Create a suite of note templates for site inspection and the valuation process.
- Where possible employ an active peer review process.
- Proactive quality assurance – set standards, ensure they are maintained through an active internal audit programme with sanctions for non-compliance.
Through the years, we have observed a good standard of compliance generally, within the profession, however, where we do see issues they are most commonly in the following areas:
- Demonstrating independence: The valuer’s most fundamental requirement is to be able to demonstrate independence and qualification for task. However, occasionally the VR reviews discover evidence of inadequate processes to check for potential conflicts of interest, and where the checks are carried out the failure to properly record the results
- Competence for task: On occasions we encounter valuers operating on the margins of their competence in terms of location or specialist skills. As with independence this is an area that we prioritise for regulatory action, because it places stakeholder and clients at risk and is of major concern to lenders and PII underwriters
- Terms of Engagement: Agreed terms of engagement are a core professional requirement. Where these documents are non-compliant, inadequate, non-case specific or missing from the file this places the firm, client and stakeholders at risk
- Audit trail: Some files do not demonstrate an audit trail of information to support the valuation, we still encounter case files where site and valuation notes are:
- missing from the file entirely
- illegible, unstructured, insufficient or impossible to follow
- do not meet the requirements for scope of inspection
- Use of comparable evidence: It is rare to see a file with no comparable evidence, but it is not so uncommon for the valuation file to lack a structured comparable analysis, leading to a note of the key valuation inputs and principal supporting reasons – in effect your thought process, the valuation rationale. A few scribbled notes on a set of sales particulars or a comparable print out are not going to stand up as evidence in court
- Clear analysis - One ongoing issue of significant concern is the treatment of information relied on to assess value. We sometimes see files where there is no mention of the source, reliability and impact on value of the information relied on to formulate the valuation, or the consequences should it later prove inaccurate.
What can clients do to help?
As a client of an RICS member or firm, you can expect observance of our standards. Clients should take time to familiarise themselves with the Red Book (which is accessible free on the RICS website www.rics.org/redbook ). It is also important to ensure you take time to ensure the valuer is RICS registered by referring to our member directory (www.rics.org/gmd ). Clients who regularly instruct valuers will usually put in place a system of vetting and control to ensure that valuers instructed have appropriate experience to undertake the task in hand and that firms have strong internal controls. In the event that you believe a valuer has seriously failed to observe RICS standards, RICS welcomes complaints which will be considered under our disciplinary process www.rics.org/regulation).
Ultimately it takes professional valuers, clients, redress providers, insurers and RICS to work together to maintain standards and for this reason we encourage active engagement from all parties in the valuation process. For this reason we are consistently working on building a deeper and more proactive dialogue with lenders and other institutional clients, to ensure we understand how the profession is performing and where the challenges lie from the client perspective. After all, valuation matters!