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A Review of Ethical Standards for RICS Chartered Surveyors: Avoiding Conflict When Carrying out Red Book Valuations
- Jul 27, 2020
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by Julie Norris, Partner and Charlie Roe trainee Solicitor at Kingsley Napley
Across all industries there has been an increased focus on ethical behaviour of businesses in recent years. Adhering to a strict ethical code of conduct is seen as both a social and commercial imperative. In keeping with this trend, the Royal Institute of Chartered Surveyors (RICS) has recently announced that it will be reviewing its ethical and valuation standards throughout 2020, citing “changing public expectation over the independence of professionals.”
This consultation appears responsive to concerns about possible conflicts of interests where regulated firms have been appointed to provide valuations of specific assets whilst also being engaged by the same client, and charging fees for the provision of other consultancy services such as property advice or management.
When such commercial interests are at stake, the integrity of the valuation may be called into question. This situation is specifically highlighted in the RICS Valuation Global Standards (the Red Book) at section PS 2, paragraph 3.9 as one which should be regarded a presenting a potential or actual threat to the independence and objectivity of the valuer.
The current RICS guidance on conflict of interests
RICS currently has in place mandatory guidance concerning the avoidance and management of conflicts of interest. This guidance mandates the use of information barriers in order to effectively manage situations where a conflict of interest exists between departments within a multi-disciplinary firm. VSP 1, paragraph 3.1 of the guidance states:
RICS regulated firms must have in place effective systems and controls appropriate to the size and complexity of their business.
The Red Book also necessitates the inclusion in the terms of engagement of a statement disclosing any factors ‘that could limit the valuer’s ability to provide an impartial and independent valuation.’ These ‘factors’ would include the valuer-firm providing other consultancy services to a prospective client.
The Red Book further highlights the potential for problems arising when the same surveyor provides valuations for the same client for a number of consecutive years. PS 2 paragraph 5.4.2 states:
Where the member responsible for the valuation in accordance with this standard holds that responsibility for many years, familiarity with either the client or the asset valued could lead to the perception that the member’s independence and objectivity has been compromised. In order mitigate this risk, the Red Book goes on to state: RICS considers it good practice, albeit not mandatory, to rotate valuers at intervals not exceeding seven years. Having correctly identified the risks, this can hardly be said to be a stringent policy. It has been suggested that one of the proposals following the RICS consultation will be to ensure there is a more frequent rotation of valuers who deal with specific clients.
What the future may hold
Despite being the largest investment asset class in Britain, the real estate sector has so far escaped the level of political scrutiny and regulation that has been directed at the financial markets. This scrutiny is exemplified by the recent ministerial calls for the separation of audit and consultancy functions in accountancy firms following a series of high profile scandals involving conflicts of interest. The RICS consultation and commitment to review its standards should be understood in this context and be seen as an important step in efforts to retain public trust and relevance, and to stave off potential governmental regulation.
About the authors
Julie Norris is a Partner in the Regulatory
department and specialises in advising in the health, professional services, legal and financial fields.
Charlie Roe is a trainee solicitor. Charlie has
assisted across a range of matters defending
regulated professionals who are subject to regulatory investigations or proceedings.