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Problems in the Valuation Market

Special Reports

by Martin Burns, Head of ADR Research & Development, RICS

 

In July 2013, The Royal Institution of Chartered Surveyors (RICS) commissioned an independent report on the operation of the UK valuation profession. Earlier research by Mortgage Strategy had indicated that the valuation market was not working as it should. RICS believed, therefore, that a root and branch analysis of the market, and discussions with key stakeholders, was essential to identify the cause of problems and finding answers as to how they could be resolved.

Former MP and FSA Board Member Dr Oonagh McDonald CBE, Chaired an independent commission, which published its report and recommendations in 2014. The report maintains that problems exist in every aspect of the market. Dr McDonald said: “The problems in the valuation market are multi-faceted. They run deeper than might be supposed at a casual glance, and cannot be solved by a single ‘silver bullet’. She set out twelve recommendations designed to help the
market to function better, and advised that the recommendations “require a co-ordinated response from the stakeholders to achieve the objectives which are in their own interests and the interests of the public

To an extent the problems in the valuation market are due to residual consequences of the financial crisis, but problems also arise out of recently established practices of those operating in the market. One such practice has been a propensity by lenders to regard nearly all valuations as potentially negligent, and to consequently pepper surveyors with countless claims that in reality are unlikely to be pursued.

“Confetti Letters” is the appellation that has been given to the huge number of pre-action letters issued to valuers by solicitors acting on behalf of lenders. Litigation in most cases where a confetti letter is issued is highly doubtful but, in any event, valuers must notify their insurers. Frenetic negotiations often ensue in attempts to avoid costly and slow litigation, and the outcome in many cases is financial settlement, where insurers pay compensation even though there has been little or no exploration of the merits of the claims.

Confetti letters have often been sent, so-to-speak, in “bundles”, and at any one time a valuer may receive 100 plus letters relating to valuations s/he has provided.

Whilst there is concern that many confetti letters are not always legitimate claims, insurance companies will nevertheless settle so as to avoid costs and delay of potential of litigation. Inevitably, this had led to a significant rise in Professional Indemnity Insurance (PII) premiums and overall difficulty in firms obtaining PII Cover. This is causing major problems for the valuation profession, not least because of the impact, now and in the future, on the ability of valuers of residential
and commercial properties to obtain affordable PI insurance.

This scenario can create constant tension between lenders and valuers, and may eventually lead to the profession becoming uninsurable.

Following publication of Dr McDonald’s report, RICS held a number of roundtable events to discuss the findings with invited guests from the lending, insurance, legal, regulatory and valuation sectors.

Following on from the round table events, both commercial and residential groups from the industry set up a dedicated cross sector working group, bringing together surveyors lenders, insurers and regulators to systematically review the recommendations. Their remit includes developing realistic and workable solutions to the issues identified in the report.

One of the activities pursued by the cross sector group has been to explore ways to adopt a key recommendation to introduce a form of ADR in the sector.

ADR was recommended by Dr McDonald as a way to tackle the considerable problems arising out of “confetti” Letters. With this in mind, an invitation was sent by the Cross Sector Group to the Dispute Resolution Service (DRS) at RICS and Beale & Co, Solicitors, to scope a viable Alternative Dispute Resolution (ADR) process for lender/valuer disputes.

DRS and Beale & Co teamed up to develop an ADR process designed specifically to help lenders, valuers and insurers, whilst ensuring there is an appropriate balance between their relevant interests.

The ADR process draws on established methodologies, i.e. Independent Valuation and Adjudication. These procedures are routinely used with immense success in the UK and globally to reduce conflict and decide disputes, without the need for intervention by the courts or other official bodies.

The ambitions of the ADR process are to:

• Facilitate negotiations and, where required, provide independent and binding decisions on all the parties involved

• Improve the quality and negotiating capacity between lenders and valuers

• Create greater transparency in the process of resolving disputes between parties

• Be cost efficient and save money

• Be fair and impartial

RICS is currently undertaking a consultation on the proposed ADR process before launching it in the autumn of 2015. If you have an interest in the valuation market and would like to know more about the ADR process, and/or take part in the consultation, please contact
Samantha Dunbar This email address is being protected from spambots. You need JavaScript enabled to view it..

Martin Burns
Head of ADR Research and Development, RICS
22 June 2015

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