Independent commission on valuations. Response by the Council of Mortgage Lenders to the independent inquiry into valuation

Transcription

1 Independent commission on valuations Response by the Council of Mortgage Lenders to the independent inquiry into valuation Introduction 1. The Council of Mortgage Lenders (CML) welcomes the opportunity to submit evidence to the independent inquiry into the valuation market in the UK. We would also welcome the opportunity to give oral evidence, should this be required. 2. The CML is the representative trade body for the first charge residential mortgage lending industry, which includes banks, building societies and specialist lenders. Our 112 members currently hold around 95% of the assets of the UK mortgage market. 3. The submission addresses many of the questions set out by the commission s terms of reference and context document, from a lenders perspective, where those questions are pertinent to the lender. We have also raised some other matters for consideration. Executive summary 4. The recent media attention over valuer shortages in the residential sector, at a time when the housing market appears to be picking up, is a symptom of more systemic issues within the valuer market. This could act as a catalyst for positive change by the regulator. Lenders are volume clients of valuers for residential mortgage valuations, and as such are uniquely placed to offer insight into some of these issues, and offer suggestions for change. 5. The independent inquiry has identified a number of key issues, on which we comment from the lenders perspective. This includes the nature of the residential mortgage valuation, and how it is currently used. In particular we underline that the residential valuation is commissioned for a particular purpose, to provide a valuation for the lender on their security, and is not an in-depth survey. This is not always well understood, and is something which RICS has a key role in clarifying. 6. We have also commented on matters linked to risk and reward. The consolidated nature of the market and influence of particular features such as lender panel managers has contributed to downward pressure on valuer fees in the residential space, and there appear to be issues of transparency as to how the fee is apportioned. And, for some time now, we have argued that the current professional indemnity insurance (PII) market is unsustainable and valuers, lenders and other clients need a model which gives them confidence and which provides protection against negligent valuations. Despite a major review of the key issues within this market, and range of recommendations provided, RICS have yet to take steps toward positive change. 7. Following the credit crunch and subsequent downturn in the housing market, there was rapid downsizing of the residential sector. Those who remain are of an aging demographic and there has not been a substantial programme to attract new blood into the sector. The pathways to entry appear in need of simplification, and we would encourage RICS to review how the qualification framework can work to attract new entrants and bring people back into the residential sector, without diluting the professional skills and competencies required. 8. Finally, to create more confidence and assist in the sustainability of the market going forward, we think there are several ways in which RICS could better show its leadership role. These include more effective regulation by highlighting best practice and better enforcement to reduce poor practices seen across the industry; increasing awareness in the industry of how fraud can be perpetrated; and taking a stronger oversight role, as well as looking at ways in which clients can be better protected, in the event that a firm fails. address North West Wing Bush House Aldwych London WC2B 4PJ telephone fax website

2 Perceived Valuer Shortage 9. Many of our members are experiencing delays, linked to a shortage of valuers able and willing to do residential mortgage valuations. The delays are most prevalent in London and the South East, according to the vast majority of lenders we canvassed about the delays. This resonates with our mortgage market data which shows strong lending activity in these areas. There is some anecdotal evidence of delays in other regions, principally the larger urban areas. Some lenders are reporting seeing turnaround times delayed with consequent impact on the process of issuing out mortgage offers and the resultant impact on customer experience and market efficiency. But the picture is not uniform. 10. From the lenders perspective, the factors playing into the current shortage are a combination of increased mortgage lending activity, against a backdrop of declining residential mortgage valuer numbers, stemming from the rapid downsizing in the property sector during the early years of the economic downturn. 11. Lenders are looking at ways of coping with the shortage. Amongst the short-term options lenders are considering, are a relaxation in service levels, and where appropriate, alternatives to physical valuations, such as desktop appraisals and Automated Valuation Models (AVMs), which calculate individual property valuations using a statistical model, informed by market data. The use of AVMs would however, be limited to the extent that the tool can be prudently used; and this is set out in more detail below. However, we feel the current shortage links to more systemic, rather than shortterm issues which will not be resolved by any quick fixes. We hope that the inquiry will look beyond the short term to these underlying issues. 12. There are a range of views on the reasons for the declining numbers of valuers over recent years. Many lenders have pointed to the on-going lack of entrants into a profession which is struggling to attract new blood, coupled with an aging existing demographic. Our views on what RICS might do to mitigate this are explored further below. 13. Given the increasing automation of the work, it would be understandable if valuation work had become less attractive to many individuals, compared to say, more in-depth surveys. Some noted a trend in valuers seeking private client work, rather than working with umbrella organisations and or large valuation companies, in part because of the more attractive fee levels in private client space. The general levels of remuneration, as well as the constraints around the high cost or unavailability of PII insurance are also factors in making other parts of the market more attractive to valuers. 14. Somewhat inevitably, the number of valuers working in the residential valuation sector declined significantly as a result of the near-halving of transaction numbers post-crunch (from around 1.28m transactions, to the low 600,000s in the last few years). One result has been that the pool of valuers has become smaller and of an aging demographic, leading to the current pinch point as market activity begins to increase again. Residential Mortgage Valuations - content 15. The commission s context document notes that there is confusion amongst consumers as to the nature of a mortgage valuation. In this context we have taken it to mean the borrower as consumer rather than the lender as consumer of these services. This is despite the fact that the mortgage valuation is done for the lender and not the borrower. There is indeed no obligation on the lender to provide a copy of the valuation to the borrower, although many do. Lenders are required to provide the valuation figure in the Key Facts Illustration provided to every borrower. 16. Lenders procure the valuation for a specific purpose: to inform a secured lending decision. The lender will require that the valuer is independent, and conflicts of interests are avoided, and the valuer/borrower engagement in that sense should be minimised. 17. UK Appendix 10 of the RICS Valuation Standards Red Book sets out the standard approach to the provision of advice to prospective lenders on the security offered in either a owner-occupied, or buy to let scenario, and it has been agreed between RICS and CML that this specification will be incorporated into commissioning requests from lender members. This provides a level of consistency. Lenders can set their own criteria over and above this, normally relating to their existing valuation and

3 lending policies generally, and will depend on risk appetite. However, none of this overrides the valuer s professional responsibility and their obligation to act in accordance with the Red Book. 18. In lenders experience they find that customer understanding of the differences between a mortgage valuation and a more in-depth survey does vary; lenders do seek to explain the limitations of the mortgage valuation in customer literature. There is clearly potential, given the variances in borrower understanding, for RICS to look at some form of consumer education about the differences between types of residential valuations; we believe that RICS is clearly the most appropriate body to do so, given they set the professional standards for these valuations. 19. Lenders report that few customers will commission their own more in-depth survey, probably because its cost is an inhibiting factor. CML has long advocated that borrowers should purchase more in-depth surveys, rather than rely on the lenders valuation, which, as noted above, is commissioned with a particular objective in mind. Purchasers of a property can then get a better understanding of the potential issues with the property they are purchasing and any subsequent costs they might face. Anecdotal evidence from members suggests that only up to a quarter of customers purchase a detailed survey; many lenders would quote a much lower percentage. Scotland 20. The situation in Scotland is somewhat different than in England and Wales. There, the seller has to provide a Home Report which contains a great deal of information on the condition of the property and a valuation figure. This report can be relied upon by both the seller and the buyer in terms of the legislation introducing the Home Report. As a result, the practice has developed of the majority of Home Reports being accompanied by a generic mortgage valuation and the lender then relying on information being taken from this generic mortgage valuation into a mortgage valuation report in the lender s own format. 21. This system is not without its challenges. The Home Report often has to be refreshed, particularly in a low market where properties take longer to sell, as lenders tend to regard a valuation as being out of date around three months after it has been produced. There is also anecdotal evidence, during this recent low market of properties selling for much less than the Home Report valuation, of a reluctance amongst Scottish valuers to amend valuations in these circumstances, which leads to lender concerns of a risk of over-valuation with a regional bias. Use of AVMS 22. Where a potential lending situation falls at lower end of the risk curve e.g. low LTV remortgages and further advances, lenders may use AVMs, which obviates both the need for a physical valuation of the property and for an individual to carry out a desktop appraisal. It can therefore potentially help ease delays caused by shortage of valuers. 23. As mentioned above, AVMs are limited in their application, and can only be used where there is enough comparative data to yield robust results. This means AVM s are not able to be used in certain geographical regions where there may be limited data to supply the model, or where the market is small in size; for example, AVM s have a very limited application in the new build market. There may be a case for some increased usage of AVMs, to help to manage the medium to long term resolution of the shortage, particularly if those retiring from the profession are not replaced by new entrants quickly enough to match market demand. However, lenders would need to be satisfied that greater use of AVMs did not increase their credit risk. Fees 24. The level of fees currently paid in the market is impacted by a number of factors. First, the housing market itself recovering from several years of low transaction volumes, which of itself leads to fiercer competition and lower fees which follow. 25. Second, the valuer market is dominated by a small number of large firms, and indeed many of these work on behalf of lenders, often in a panel management role, as they are geared toward volume lending valuations. They have a powerful role in determining the rates paid in the market, as typically it is these firms who enter into a competitive tendering process to work for a lender.

4 26. Lenders are negotiating from the position of a bulk user of valuation services, and will be naturally seeking the best commercial outcome, but it is the nature of agreeing contracts that it is up to the parties to negotiate what they consider to be an acceptable outcome. If valuation firms are prepared to submit low tenders to obtain volume business, then it is up to those firms to ensure that this is a sustainable cost. It is probable that the emergence of large firms operating as panel managers and working in natural competition has dampened any upward pressure in fees. 27. Some lenders will charge an administrative fee as part of the cost of the mortgage valuation. Lenders are required to ensure that the fees they charge are clear, fair and not misleading in accordance with the Financial Conduct Authority requirements for mortgage conduct of business (MCOB). These fees must be set out in customer Key Facts Illustration documentation and include the fee payable for the valuation and any administration fee charged by the lender for arranging the valuation. 28. We understand that there are some panel managers who receive the full valuation fee stated in the lender documentation, but extract some of this fee in payment for their services. We have had anecdotal reports from members that in some instances, the valuer s fee in the hand can be substantially diluted, once that panel manager s handling fees are extracted. Depending on the commercial arrangement between panel manager and lender, this may not be transparent to the lender and may mean that the valuer receives less than might be expected. However, no regulatory requirements are breached in these circumstances. 29. It has also been observed by some lenders that the range of properties, and locations across which residential mortgage valuers operate, means that the level of the fee, which is often linked to the sales price of the property, may not fully reflect the work undertaken. 30. A consolidated market, operating in a low transaction environment for some years (though volumes are on the rise), coupled with fierce competition for volume work, and the nature of how the fee is set, means fee levels have faced downward pressure. This has the potential, although currently there is no substantive evidence, to force valuers to compromise on the standards and seek to mitigate lower fees e.g. by increasing the number of valuations they undertake per day. 31. Lenders have mixed views on whether standards have been impacted and experience has clearly differed across our membership. Many lenders are happy with the level of service they receive, which is positive and is a reflection of the many valuers who do provide a competent level of service. However lenders have also given numerous examples of poor practices within the industry. Lenders are watching for signs that service levels are dropping, and are monitoring standards closely. Use of panel managers in mortgage valuations 32. As set out above, many lenders do use panel managers in the current valuations market, and indeed some own surveying firms. There is a natural linkage between lending and valuation services, and this approach has parallels in other markets, such as in the insurance industry, where motor insurers own breakdown assistance companies. 33. There are some variances on how the panel managers operate. Some act as pure panel managers, who take in lender instructions and issue out to panel firms, without undertaking any instructions themselves. Others will carry out a combination of employing their own work force to carry out some of the instructions, and panelling out to other firms as required. 34. However it is not true to say that all lenders are using panel managers. There are some lenders who use staff valuers as well as external firms when instructing mortgage valuations, effectively acting as their own panel managers. Some smaller lenders, typically building societies, will instruct completely in-house, using their own employees to carry out valuations, though this is a very small portion of the market. 35. The dominant model, is however, use of panel managers. The move toward panel managers has been driven by the efficiencies that can be achieved by having a centralised, consistent method of instructing valuations across a wide geographical area, particularly for those doing volume lending, as customers demand swift and simple processes. Panel managers will also audit to provide quality

5 assurance and work to agreed service levels, which allow the lender to plan and manage risk, as well as achieve a measure of consistency across the areas they lend. Professional Indemnity Insurance (PII) 36. The CML responded to the 2012 RICS report on PII in the sector. In that response, we set out the lender perspective on they key issues with the current PII market. We argued that the current situation is unsustainable and valuers, lenders and other clients need a model which gives them confidence and which provides protection against negligent valuations irrespective of the continued trading of the valuer or the ability of the valuer to obtain run-off provision. Lenders, in conjunction with other stakeholders, have been reviewing alternatives such as a transactional insurance, for example, which provides PII cover for the life or run-off period of the valuation, as this may better protect lenders and other clients. 37. The cost and availability (or lack thereof) of PII acts as a bar to entry and militates against retaining people within the residential valuation sector of the profession. In particular, the lack of runoff cover availability for firms can expose individual valuers to personal liability, which could impact on their future employment. 38. The Valuer Registration Scheme (VRS) has been a step in the right direction, but can be improved by more focus on the quality of the valuation, not just the processes followed. Lenders would be better served by a process which mitigates valuation risk prior to the submission of the valuation. Such an approach should also reduce the risk to PII insurers and therefore benefit all parties. 39. We are very open to working with RICS to improve areas of market failure and addressing the risks which lead to claims. The high claims rate points to a need for improved training, auditing and regulation within valuation/surveying practices which would assist in reducing claims and therefore PII premiums. Lenders have, in recent times, been criticised for making negligence claims without specific evidence, particularly in the wake of the credit crunch. We understand, from anecdotal reports, that this practice may have been prevalent amongst some secondary lenders and we do not condone this approach. However, we do support the right of lenders, where they have suffered loss, to pursue appropriate avenues of compensation. 40. With regard to the liability of third parties, and particularly in respect of lenders being able to securitise loans, while of course the RICS and industry should understand the implications, it is important that lenders are allowed the ability to securitise, as this enables further lending to be undertaken, which is in the interests of the valuation sector. 41. It is not clear, notwithstanding the range of recommendations from the report, what RICS s plan of action is with regard to PII. We consider that the failure of RICS to intervene into this fundamental area calls into question the amount of regulatory control and influence that RICS is able to exercise over practicing firms and members. For the future, better regulatory control of firm s standards would be helpful in reducing PII claims, and large surveying firms should lead the way in setting these standards. Pathways to entry 42. The route to becoming a qualified valuer is not simple, and RICS should consider how they can simplify the training and entry requirements, without compromising standards, as lenders are naturally concerned that the valuer they instruct is appropriately experienced and competent. 43. A significant number of lenders already accept alternatives to full MRICS qualified valuers, such as those who are AssocRICS qualified, however with appropriate risk management strategies, for example using them in lower risk lending circumstances (e.g. low LTV). However, we understand that AssocRICS is not a straightforward entry pathway. There may be benefit in looking at a phased structure to qualifications, so that individuals can become qualified in more areas over time, coupled with an appropriate oversight mechanism. This could help tackle the lag from entry to full qualification. 44. Fast-tracking qualifications may also be a possibility, but would need to be carefully considered. They could be usefully targeted at dormant valuers and valuers in other sectors, e.g.

6 public and commercial property. More RICS guidance to clarify the limitations of the technical qualifications such as Assoc RICS as well as enhanced regulation to encourage and protect new entrants would also be beneficial. 45. Overall, we feel that RICS could do more to actively recruit new entrants to the profession, particularly for the residential sector, by targeting higher education bodies and through graduate and apprenticeship programmes. As outlined above, alternatives to MRICS should be explored, but equally need to be risk-managed well so as not to compromise the service. 46. Something which may merit further discussion is how the VRS can be better leveraged. The membership of the VRS could become a kitemark of quality confirming that the company/valuer has undergone inspection in relation to systems, quality control, financial probity and compliance. This would allow RICS to incentivise good standards through the VRS and provide members with a useful way of promoting their services. Market transparency and the consumer interest 47. As outlined above, there is clearly opportunity for RICS, as the professional body responsible for valuers, to embark on a consumer education programme for consumers, to help them understand the different types of survey in the house-buying process. 48. In relation to fee transparency, there is already a regulatory requirement for lenders to be transparent with borrowers about the fees they charge, and CML reminds lenders regularly of their obligations to their borrowers to be clear, fair and not misleading, which includes the need to set out valuation fee charges. 49. But there does appear to be a challenge as to how the panel manager passes on fees and what cut is taken. This is not unique to the residential valuation sector. Similar challenges have been faced in the motor insurance market, which involves a range of third parties who are not directly connected to the customer/claimant. Other key concerns from a lender perspective 50. To create more confidence and assist in the sustainability of the market going forward, we think there are several ways in which RICS could better show its leadership role. Some of these have been touched on above. These include more effective regulation by highlighting best practice and better enforcement to reduce poor practices seen across the industry; increasing awareness in the industry of how fraud can be perpetrated; encouraging new blood into the profession via attractive, simple and flexible career pathways and dealing with failed firms more effectively. 51. While generally lenders see acceptable standards in the profession, poor practices do exist. These include working outside an acceptable geographic area, i.e. a wider than 25 mile radius; a general lack of experience, weak internal controls and using weak comparable evidence, working over capacity, and not declaring conflicts of interest. By increasing awareness of poor standards and setting out good practice, RICS could improve compliance with standards. RICS should also consider more meaningful penalties for those who don t comply with the Red Book. 52. As mentioned above in the context of PII, while the Valuer Registration Scheme has been a step in the right direction, RICS could improve on this scheme by incorporating greater focus on the quality of the valuation, and potentially turning into a kitemark, as set out above. This should include reminding those in the profession of examples of both good and poor practice. RICS should also bear in mind how to keep professional standards high as they consider the pathways to entry. 53. One area where we believe RICS should focus as a regulator is on the issue of failed firms. Where firms cease to trade, currently there is a requirement for run-off cover. If the firm ceases to trade due to financial pressure, and had a poor claims record, it is unlikely that the run off cover will be affordable and then exposes clients of that firm to risk should they need to claim. RICS should consider a guarantee fund (this could be funded by the profession) to cover the instances where PII is not in place. This exists in a number of other professional service sectors.

7 54. A further issue which lenders have seen in the recent downturn is the emergence of so called Phoenix firms which evolve from defunct firms, and run by the same individuals. If the firm has ceased to trade because of poor practices, it is concerning for lenders to see these individuals reemerge. RICS should, as regulator, be protecting against this circumstance. Conclusion 55. There are clearly a number of structural issues within the valuer market, particularly in the residential sector. We recognise that lenders are an influential player within the market and we want to support RICS as a regulator in tackling these structural issues, so that the residential valuation sector moves forward from the recent economic downturn and is seen as an attractive career pathway which attracts professional, competent individuals. Further contact 56. This response has been prepared by the CML on behalf of its members. Any comments or enquiries should, in the first place, be directed to Jennifer Bourne, Jennifer.bourne@cml.org.uk 30 September 2013