COVID-19 EXPERT LEGAL INSIGHTS

Welcome guidance on the approach
to valuations from RICS during
Coronavirus pandemic

26 March 2020

According to RICS, the effects of the COVID-19 Virus will affect the work carried out by RICS members in a variety of ways with varying impacts. For example, the Government’s latest restrictions on the freedom of individuals to move around, may in turn lead to an unwillingness of occupants to allow surveyors access to properties in order to conduct a valuation. Comparable data might not be as freely available as it was before the outbreak, which may hinder the ability of surveyors to take into account regional or local market considerations in a particular area. In response to the COVID-19 crisis and issues such as this, RICS has published guidance to its regulated community on how practise may need to change, including guidance on valuation, client visits and inspections, professional indemnity insurance, client money protection and SME’s considering closure. 


The latest guidance, Support and guidance for SME’s, confirms that RICS has taken the decision to suspend all Red Book valuation audits due to concerns that many firms may not currently be able to comply with the requirements on a practical level.  For SME’s that are currently bringing forward difficult decisions to close their businesses either temporarily or permanently, RICS has issued specific guidance to help members do that in a way which complies with the Rules of Conduct. This includes a closing down checklist and guidance about agreeing a closure date, the ethical and legal considerations surrounding insolvency, staff, informing clients, handling client money and professional indemnity insurance.

New RICS guidance

One of the most significant of the challenges for members is economic uncertainty and in responding to that, RICS has issued guidance on valuation in the form of a RICS’ Valuation Practice Alert. This reminds the profession that it should be transparent and professional about the challenges they face. In particular RICS has said:

RICS members must agree at the outset with their clients any changes to the way they would normally proceed with instructions and record in writing the agreed changes.  RICS would strongly encourage members to make detailed file notes to support the rational that underpinned the changes”

Approach to material uncertainty

It has long been recognised that market disruption can reduce the level of certainty that can be attached to a valuation. Market disruption can arise due to unforeseen financial, macro-economic, legal, political and natural events, such as COVID-19. Whether that uncertainty arises from inconsistent empirical data, the absence of such data or unprecedented circumstances, a surveyor must use their best judgment and express it clearly without producing a report that misleads or creates a false impression.

It is these kinds of events that can lead to uncertainty which is to such a degree that it falls outside any parameters that might normally be expected and amounts to a ‘material uncertainty’.

How to present (COVID-19 related) material uncertainty 

The Valuation Practice Guidance Applications (VPGA) recognises that in most cases, material uncertainty need not be reflected in the valuation figure quantitatively, but should instead be expressed in qualitative terms. Helpfully and in response to recent events, the Valuation Practice Alert issued by RCIS suggests a form of words to be used where material uncertainty is declared which specifically refers to the COVID-19 outbreak and the consequent impact it has had on global financial markets.

The suggested wording includes:

Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgment.

Our valuation(s) is / are therefore reported on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty – and a higher degree of caution –should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of [this property] under frequent review.

This reminds surveyors that in the current climate much less weight can be attached to previous market evidence for comparison purposes and a higher degree of caution needs to be attached to valuations. 

The Valuation Practice Alert encouraging the use of material uncertainty declarations due to the economic climate is to be welcomed. It is plainly more helpful for a regulator to provide its profession with meaningful and relevant guidance, than later discipline members who have made a mistake or misjudgement in such unusual times without the benefit of any proper guidance.

 

Will the regulator moderate its approach? 

The latest guidance issued by RICS, Support and guidance for SME’s, sets out the approach they will take to handling any regulatory cases. Importantly it confirms that they are still committed to regulation and upholding professional standards but they will be adopting a risk-based approach, which is balanced and proportionate to a firm’s size, scope and complexity and the unprecedented conditions we find ourselves in. RICS has also said that this important context “will be considered in regulatory cases, along with mitigating and aggravating factors, when assessing seriousness and any regulatory outcome.”

This ought to be somewhat reassuring to regulated members and firms that are facing difficult ethical, regulatory or professional judgments as a result of COVID-19 and its fall out. We advise anyone adopting a revised approach as a result of the current situation to record their reasoning in a file note, so that it can be referred back to later if necessary in the event of any regulatory interest.

 

About the authors

Julie Norris is a partner in the Regulatory Team. She specialises in advising in the health, professional services, legal and financial fields, advising professionals, businesses and regulators on regulatory compliance, investigations, adjudication, enforcement and prosecutions.  Clients come to Julie for advice on regulatory issues that affect their ability to practice or run their organisations, as well as those regulatory issues that may affect their reputation or professional standing.

Sian Jones is an Associate in the Regulatory team. She specialises in defending professionals across a number of different sectors. In the professional services sector she advises surveyors facing regulatory proceedings brought by RICS and advises regulated firms on their wider regulatory obligations such as reporting requirements and carrying out internal investigations into employee misconduct.  Sian also advises professionals such as lawyers, doctors, accountants and talking therapists. 

 

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