- Chris Thorne
Just following the rules
Most valuers will be aware of standards, such as the IVS or RICS Red Book, but is simply following the rules and including the necessary recitals in your documents sufficient to protect your clients, and ultimately yourself from the risk of an inadequate or erroneous valuation? I do see or hear of cases where there is a misplaced faith in standards as a form of "comfort blanket", a heuristic trap that valuers need to be aware of and avoid.
Risk is inseparable from valuation. However, although professional valuers may take pride in their expertise at identifying and measuring risks in the marketplace, in my experience many do not pay sufficient regard to managing the risks involved in providing this expertise to their clients.
Most of my experience comes from real estate. However, I have spent enough time with valuation experts in other asset classes, ranging from businesses to financial derivatives, to realise that proper management of the risks inherent in the valuation process not only protects the provider of the valuation but also enhances its credibility for those who need to rely on it. So why the apparent insouciance?
I have a theory that this is partly due to valuation standards. Before I get burned as a heretic, I should hasten to explain that I see the problem as a misplaced expectation of what valuation standards are for and what they can do. The primary reason valuation standards exist is to protect the public interest by stipulating information that must be disclosed to enhance credibility and help those relying on the valuation compare like with like. However, they do not prevent mistakes being made, either in the way the valuation is carried out or in the way the standards are applied.
Most real estate valuers in the UK are members of RICS and accordingly are obliged to adhere to its professional standards for valuation, the “Red Book”. RICS has been very successful in promulgating these standards and they certainly provide an essential component of sound valuation practice. However, the high profile of the Red Book has meant that a degree of myth has grown around it, with some valuers and clients believing that it contains more than it does and its mere mention will ensure a valuation is satisfactory. Of course, there is promotional benefit in the aura created by the myth but it can also breed hubris. Anyone who believes that the Red Book alone can assure quality and prevent errors being made is being unrealistic.
One of the main problems I see is a failure to think hard enough about how the principle behind a Red Book requirement is best applied to the type of valuation work undertaken by the firm. There are very few requirements that do not allow the valuer a degree of discretion in how they comply, but too often this discretion is not wisely exercised. Adjectives such as “adequate”, “reasonable” or “material” are often used to qualify requirements of the Red Book, but I seldom see firms actively reconciling these with the needs of their clients and valuation services that they provide. What is “reasonable” depends upon the context in which the advice or information is being imparted, and firms need to be able to justify this if challenged.
Instead of integrating the principles of the Red Book into their service, I often see a “tick box” approach being adopted where the valuer just includes some words or headings that match requirements in the standards with little obvious attempt to make them relevant to the task in hand. This is most often manifest in the terms of engagement (ToE) and report.
The requirement in the Red Book to provide written ToE before the valuation is completed is simply a reflection of the common law. To be deemed to be part of a contract, any condition on the provision of a service must be notified to the user of the service in advance. However, this basic principle is often overlooked. I have seen many examples of ToE based on a Red Book list of minimum requirements but which do not accurately describe what the valuer will investigate or assume in practice. If a problem arises and the valuer has acted outside of the ToE, they are immediately on the defensive and cannot rely on caveats that only appear in the report. Firms need to make sure that, as well as incorporating all the subjects required by the Red Book, the ToE accurately describe what will normally be done and what will be assumed, and that this is all adequate and reasonable.
A similar problem often arises with reports. Most firms will have a template that contains the Red Book minimum requirements. However, in practice there is often a reluctance to depart from the template to make sure that words reflect the facts found and make sense in the context of the valuation task in hand. It is not unusual to see a report that may contain all the minimum contents listed in the Red Book but which completely fails to comply with the overriding requirement to be neither ambiguous nor misleading.
Of course, adequately managing risk requires a firm to not only make sure that its valuers understand and apply the standards appropriately, but that they have a system of checks before delivery and audits afterwards to ensure that this is happening. This needs to be proportionate to the size of firm and type of work it undertakes but if it improves your product while reducing the risk of a catastrophic claim it is surely a wise investment.
This article originally appeared in the October 2017 edition of Pi magazine, published by Howden Insurance Brokers.