REFORM REQUIRED TO ENSURE COMMERCIAL VIABILITY
There are current risk and pricing concerns in the surveyors' professional indemnity market following the financial crisis in 2007/8, which had an especially pronounced effect on the property market and may have a long-term structural impact on professional indemnity insurance. As a consequence, the Royal Institution of Chartered Surveyors (RICS) published a consultation report last December on the state of the PI market for surveyors who undertake valuations.
The consultation paper identified that the valuation business could not subsist as a viable commercial service with increasing PI premiums and increasingly onerous conditions and levels of liability in client contracts. This results in valuer insolvencies and reduced public protection due to the service being uninsurable and therefore unavailable.
Investigating the potential for reform, RICS invited interested parties to make submissions in response to a series of consultation questions. RICS has now published its report on the outcome of the consultation, with industry feedback and reaction to their recommendations.
THE OUTCOME OF THE CONSULTATION: FEEDBACK AND RECOMMENDATIONS
1. Response to RICS's understanding of market conditions and practice:
Respondents agreed that RICS comprehensively and correctly identified market issues, the most significant of which include:
- Wide-spread under-pricing of survey and valuation products when compared to claims risk and cost
- A trend of transferring the risk of decision-making from the client to the valuer
Respondents also identified an increase in litigation owing to the availability of legal advice under conditional fee arrangements and after the event insurance. It was agreed universally that current market practice is unsustainable, as evidenced by the increasing rate of insolvency, and any new approach to these issues needs to result in a solution that is fit for purpose both now and throughout future economic cycles.
2. What needs to be done to correct imbalances to provide reasonably priced PI insurance?
The consultation concluded that in order for valuation business to be commercially sustainable valuers should price to reflect risk and reward. This includes setting liability caps commensurate with the fee and risk. Further, lenders, who are imposing increasingly onerous terms on valuers, including pushing for personal guarantees, should be made aware that their practices add risk and may result in a lack of qualified professionals in the market.
3. Are there alternatives to a "claims made" approach to insurance and what is the potential impact of these alternatives on the market as a whole?
Respondents were of the view that industry focus should not be on finding an alternative approach to insurance, but should be on resolving the underlying risk and structural issues in the sector that lead to claims. The proper role of RICS in this context was though not to be to find new insurance solutions, but to ensure that the necessary protections are in place for valuers and clients, and that any new insurance arrangements are quality assured.
4. Response to the proposal of an ADR adjudication scheme:
The report expressed industry-wide approval of proposals to deal with smaller claims through an ADR process (e.g. adjudication). It was agreed that RICS should agree with all parties a dispute resolution mechanism for dealing with valuation claims up to a certain value, with a view to speeding up the process of settling disputes and reducing costs.
It was suggested that RICS should enter into industry-level discussions with lenders in order to establish an agreed 'protocol.' Respondents felt as well that establishing a protocol for expert determination would further develop a sophisticated adjudicative mechanism.
5. Do professional and financial regulators have a role in defining what is acceptable claims practice?
Respondents agreed that there must be a balance between protecting the users of valuations and protecting valuers themselves, in line with consumer and competition law, which may require increased engagement with regulators.
At present any changes may have to be made through the amendment of legislation. In the meantime, however, respondents considered that the following may assist in striking that balance:
- Refraining from panel agreements where there is an agreement which results in incurring a liability greater than the SAAMCO cap
- Excluding liability to third parties
- Excluding personal liability of the valuer
- Agreeing at the outset of an instruction a mechanism for expert determination
6. Is RICS current policy/guidance on PI insurance clear and adequate to protect all parties?
Currently RICS requires firms to have "adequate and appropriate" PI insurance. Generally, the policy on this was thought to be clear. However, there is uncertainty in relation to run-off insurance, which RICS needs to clarify. It was also suggested that RICS might consider differing levels of cover for business to business and for business to consumer services.
7. What should RICS do to reduce risk and thus lower PI fees (and ultimately costs to the customer)?
Respondents were of the view that:
- RICS should continue to improve quality and the monitoring of valuers and to tackle non-compliance
- It is essential to agree a standard form of valuation terms of engagement which is amenable to all parties, and to encourage members to consider (and challenge if necessary) terms and conditions proposed by clients
- RICS should consult with lenders to resist the proliferation of narrowly-prescribed valuation report checklists, and require all valuers to agree liability caps with their clients
- It would be beneficial to establish a mentoring system to put chartered surveyors in touch with one another and host regular forums to engage in dialogue about potential areas of market failure
8. What guidance do members need in addressing quality assurance in valuations?
Respondents generally requested further RICS guidance on both administrative and substantive areas including the assessment and handling of risk, claims handling (in particular blanket "confetti letters"), standard terms of engagement, and minimum levels of experience.
An issue was also identified in valuers undertaking activities for which they may not be entirely qualified, such as reinstatement or other specialist valuations or environmental surveys. RICS emphasised that valuers should only be offering the services for which they are qualified.
Respondents also suggested that valuations over a certain amount should be required to be peer reviewed at additional cost to the client.
9. Recommendation for additional risk management guidance required by RICS:
Respondents recommended that RICS use the Valuer Registration Scheme to identify additional guidance and training courses required, and provide them to members. Areas where further guidance is required include liability capping, guidance to clients on the role of valuers, guidance on administration such as record-keeping and file management and guidance on the use of comparable and brackets in determining negligence.
Respondents felt that one practical solution might be to establish a group of experts who could provide a mentoring service to valuers, perhaps by region, and which could be facilitated through existing web-based facilities.
The industry-wide consensus was that there is currently a strain on the valuation profession, in large part owing to market and client pressures and increasing PI premiums. It is clear from RICS's initial consultation report, and the feedback contained in the published outcome of the consultation that reform of one form or another is essential in order to sustain the commercial viability of the profession.
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