The High-Level Group on Financial Supervision in the EU - Larosière Report -

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1 The High-Level Group on Financial Supervision in the EU - Larosière Report - A response by The Royal Institution of Chartered Surveyors (RICS) ID number of the European Commission s register of interest representatives: Contact: Sander Scheurwater RICS, Public Affairs Officer sscheurwater@rics.org Tel:

2 Introduction RICS (Royal Institution of Chartered Surveyors) is the leading organisation of its kind in the world for professionals in property, land, construction and related environmental issues. We qualify members and guarantee standards all over the globe. Over RICS members, who are Chartered Surveyors, operate out of 146 countries, supported by an extensive network of regional offices located in every continent around the world. Our members play a vital role throughout the entire property life cycle from initial measurement, right through to investment in, and the use of, physical structures and other assets. We also provide impartial advice to governments, policymakers and Non Government Organisations. Our Royal Charter requires RICS to act in the public interest when it comes to maintaining and promoting the usefulness of the profession. Consistent valuation of all tangible and intangible assets is a key element in the property and financial sectors. As part of our role, RICS helps to set, maintain and regulate valuation standards. RICS is the world s leading property valuation standards setter and qualification. Property assets represent the most important form of security for lending, therefore forming an important part of asset valuation for financial institutions. RICS response RICS welcomes the opportunity to comment on the Larosière report on financial supervision in the EU. This response is largely confined to those areas of direct interest to RICS members, which in relation to the Larosière report mainly relates to valuation. With this in mind we would like to comment on the following recommendations: Recommendation 1: The need for a fundamental review of the Basel 2 rules; Recommendation 4: The reflection on the mark-to-market principle; Recommendation 6: Competent authorities, supervisory powers and sanctions 2

3 Recommendation 1 The Group sees the need for a fundamental review of the Basel 2 rules. The Basel Committee of Banking Supervisors should therefore be invited to urgently amend the rules with a view to: Gradually increase minimum capital requirements; Reduce pro-cyclicality, by e.g. encouraging dynamic provisioning or capital buffers; Introduce stricter rules for off-balance sheet items; Tighten norms on liquidity management; and Strengthen the rules for bank s internal control and risk management, notably by reinforcing the fit and proper criteria for management and board members. Furthermore, it is essential that rules are complemented by more reliance on judgement. The procyclical link between International Financial Reporting Standards (IFRS) and current capital adequacy requirements is one which we agree needs to be addressed and we support a review of the Basel 2 requirements, which should result in a more stable financial basis for lending Recommendation 4 With respect to accounting rules the Group considers that a wider reflection on the mark-to-market principle is needed an in particular recommends that: Expeditious solutions should be found to the remaining accounting issues concerning complex products; Accounting standards should not bias business models, promote pro-cyclical behaviour or discourage long-term investment; The IASB and other accounting standard setters should clarify and agree on a common, transparent methodology for the valuation of assets in illiquid markets where mark-to-market cannot be applied; The IASB further opens its standards-setting process to the regulatory, supervisory and business communities; The oversight and governance structure of the IASB be strengthened. History has shown that failure to understand the value of underlying assets can have severe global consequences not only for investors and shareholders but also for the public at large. In both developed and emerging economies, valuation underpins financial decisions and forms the basis of a range of market activity; everything from home ownership and office leasing to the funding of major property and portfolio transactions, both as direct investments and via secured lending and structured finance markets. More recently, valuation has also come to be a key component in the increasingly complex world of international finance. It plays a major role in the move to converge 3

4 the world s accounting standards and International Financial Reporting Standards (IFRS), now mandatory in many countries that require revaluations, a common basis for performance measurement. RICS sets its valuation standards within the framework established by the International Valuation Standards Council (IVSC), of whom RICS is a leading sponsor. In the context of IFRS, Market Value, as defined by IVSC, is generally accepted as the appropriate measure of fair value. More information on the RICS Valuation Standards can be found in the annex to this document. Fair value accounting is a fundamental aspect of transparency in investment markets. RICS produces detailed guidance for members undertaking valuations of property for the purpose of reporting under IFRS. As long as valuations are undertaken by suitable expert and regulated valuers, in according with internationally recognised standards we believe they are a vital tool to allow investors to understand the value of a firm s assets and liabilities as viewed by the market. We are aware that at this time there are significant calls to abandon the mark-tomarket approach from certain stakeholders. While we understand that interpretation is needed in relation to the current illiquid markets for financial instruments, RICS does not believe that fair value assessments in general are exacerbating the current situation. What we need instead is transparency. The only people to gain from a lack of market value information and transparency are those with something to hide. Disclosure of consistently derived and audited fair values brings greater transparency to the markets. Consistency of professional standards and competence of valuers is therefore essential in order to provide public confidence in valuations and RICS aims to deliver this through a single framework for qualification, lifelong learning, professional standards and regulation. We would also like to stress the importance of enshrining international valuation principles into practice at a European and a national level. We strongly recommend that any valuation requirements emerging from this review, are supportive of the large amount of work which has already been done to develop an international approach and are based on the broad principles and definitions set out in the International Valuation Standards. In developing a new approach to regulating financial services, valuation of (property) assets plays a key role and RICS invites the Commission to look at the work RICS has already done in developing pan-european standards and a regulatory framework for property valuation. Regarding regulation on loan-to-value and loan-to-income ratios, we believe that a dialogue should be initiated involving a wide range of experts including valuers. In all these aspects, RICS supports a risk based approach to regulation. A combination of self-regulation and public regulation can work well, as long as there is a level playing field and no chances for regulatory arbitrage. 4

5 Recommendation 6 The Group considers that: Competent authorities in all Member States must have sufficient supervisory powers, including sanctions, to ensure the compliance of financial institutions with the applicable rules; Competent authorities should also be equipped with strong, equivalent and deterrent sanction regimes to counter all types of financial crime. Professional misconduct is profoundly damaging to the industry. The recent spate of bad banking has shown this, and also the property sector has not been immune. RICS supports the proposed sanctions against financial crime and in relation believes that all those within the property sector should be supervised by an appropriate authority under the money laundering regulations. 5

6 Annex I About RICS Valuation Standards The general ethical principles for all RICS regulated members and firms are set out in our Rules of Conduct. These are supported by detailed valuation standards (The Red Book) which is also mandatory for all RICS members and regulated firms worldwide. The Red Book, which adopts the core principles of International Valuation Standards (IVS), contains mandatory rules and best practice guidance for valuations of real estate and other assets. Implementation of IFRS requirements for current value accounting on all assets and liabilities is driving the need for truly global valuation standards. The International Valuation Standards is the valuation profession s response to the need for global standards. The Red Book, then, provides an implementation or practice framework for the application of IVS globally, ensuring that valuers follow consistent methodologies throughout the world. The global rules in the Red Book are generally recognised to be the gold standard of valuation practice worldwide and provide a broad ethical framework which can be applied to valuations of any asset type in any jurisdiction, in harmony with national legislation. They deal with the following issues: Compliance, competence and independence; Terms of engagement; Valuation bases (global); Valuation applications (global); Inspections and key considerations; and, Valuation reports. These global standards are accompanied by detailed national standards, which we seek to draw up wherever possible with national government agencies and market groups. For more information, please visit 6