RICS reforms are a positive step forward

COMMENT On 13 January, we saw the much-anticipated publication of Review of Real Estate Investment Valuations, Peter Pereira Gray’s report following his review of the valuation system on behalf of the RICS – a deep-dive into the current legislation and workings of the valuation profession and an intervention that many would argue was long overdue (see RICS rules out valuation separation, EGi, 13 January). According to Gray, there were several questions to be explored: whether valuers can ever be considered “independent” when part of a multidisciplinary practice, whether the valuation industry treats potential conflict of interest with appropriate seriousness, whether the RICS Red Book provides adequate guidance and whether valuation professionals should be required to rotate regularly? Thirteen reforms have been accepted by the RICS as a result of the findings, but what impact will those changes have on valuations in practice, and on the relationship and dynamic with clients? Recommendations and reforms Commissioning and receiving valuation reports RICS has been advised to work with industry stakeholders to standardise governance arrangements for commissioning and receiving valuation reports for high-risk and regulated valuations. While it is positive to see this addressed specifically within the findings, lenders have been asking for a greater volume of information within valuation reports for some time now. However, it will ensure that the same standard is shared by all firms and individuals and will uphold standards within the profession. Separation of valuation and advisory services The report recommends that the industry endeavours to separate valuation and advisory activities within multidisciplinary firms. There will no doubt be relief among multidisciplinary firms that the recommendations did stop short of recommending a full separation of valuation and advisory – a move that would prove problematic and, many would argue, could result in a reduction in the quality of advice clients receive if valuers aren’t as close to colleagues working in investment and capital markets. While concern is valid, it is a difficult balance to strike. The mandated separation of both disciplines hasn’t been ruled out completely should these new reforms fail to have the desired impact. Mandatory rotation of valuation professionals A time-specific, mandatory procurement and rotation process will now be introduced for all valuers. To a certain extent, the industry is good at regulating itself. While this will not necessarily be the case across the board, we do already see the rotation of valuation experts. Lenders, for example, will often pause work with a particular firm once a threshold of 10% is hit. Often businesses will work with a range of valuation experts, but the new regulations will ensure that this does take place in situations where there has not been any rotation of expertise. Appointment of a valuation compliance officer A new valuation compliance officer role will be introduced to specifically cover valuation process and conduct – a move that will help to prevent any ethical issues and act as a deterrent to prevent issues like massaging the figures and the placing of undue pressure on valuation professionals. Encouraging a culture of openness and transparency Ethical conduct was a major driver behind the launch of the report, so it’s no surprise that one of the recommendations is the introduction of a clear process to raise concerns around unethical conduct. Creation of a quality assurance panel An independently governed valuation regulatory quality assurance panel, under the remit of the RICS’ Standards and Regulation Board, will be introduced – a move that will help underpin confidence in the profession from a client perspective. Red Book updates to boost standards Additional standards focusing on the conduct and reporting of valuation instructions and meetings between valuation professionals and clients will now be included within the Red Book. Discounted cash flow and analytics The incorporation of discounted cash flow as the primary model in preparing real estate investment valuations, coupled with the use of advanced analytics will drive improvement in valuation and the use of more sophisticated techniques. Maintaining a global outlook The creation of a record of the valuation standards adopted and applied in countries outside of the UK where large numbers of registered valuers operate will underpin confidence in the standards applied here in the UK and ensure that the profession remains on a par with our counterparts elsewhere. Standardising property risk advice The development of a new RICS framework to standardise property risk advice will support valuers and help to underpin confidence in the profession and in the credibility of the RICS. Changes to post-qualification requirements for valuers Reviewing the RICS’ existing post-qualification requirements is a necessary move to ensure newly qualified valuers aren’t being asked to value large, complex real estate assets and thereby prevent mistakes being made. A mechanism for regular revalidation, and perhaps a stepped process as their experience on the ground grows, would be welcome. Driving diversity Encouraging and facilitating a diverse and inclusive valuation profession should continue to be a focus for the RICS, building on the work already being done by the wider real estate industry. Clear expectations on culture and behaviour In light of the recent issues faced by the RICS, it is a sensible and necessary step to introduce specific guidance on the behaviour expected of RICS professionals and the culture that the organisation seeks to build. It will no doubt be seen as a positive move forward, but given that the 13 reforms are broad in scope and ambitious in their objectives, do they go far enough? The reforms will certainly support best practice and discourage unethical conduct. However, their effectiveness will hinge on the speed and determination with which these are implemented. The next challenge for the RICS will be to set out a clear timetable for the delivery of the reforms and the translation of the recommendations into regulations. Whether additional reforms will be needed, and whether further separation of valuation and advisory practices is required, remains to be seen. Chris Georgallis is head of valuations at Copping Joyce Image © Jeff Blackler/Shutterstock