It is clear that many of the causes of the property and financial crisis can be traced back to either a lack of regulation or an absence of adequate enforcement, writes SEAN McCORMACK

WHEN FRANK Daly, the chairman of Nama, spoke at the launch of the Society of Chartered Surveyors Ireland (SCSI) in April last year, he said the crisis the country found itself in had its source in a banking implosion which was driven ultimately by a property market bubble.

Mr Daly asked the audience whether property professionals, along with the accounting and auditing professions, could have been more vigilant in drawing attention to the enormous systematic risk which was being created.

These were fair questions and ones that have been on the mind of many professionals. Indeed, one of the driving forces for the establishment of the Society of Chartered Surveyors Ireland (SCSI) was to ensure higher standards of professionalism in the industry.

I think it’s fair to say that the very significant surge in property values during the boom and subsequent bust due to the global economic meltdown caught many people, companies and institutions across many continents by surprise, and property professionals in Ireland were no different.

It is clear that many of the causes of the property and financial crisis can be traced back to either a lack of regulation or an absence of adequate enforcement.

One of the key areas that needed to be addressed was asset valuations which are carried out for the purposes of bank lending.

The Central Bank report entitled Valuation Processes in the Banking Crisis – Lessons Learned – Guiding the Future published at the end of 2011 highlighted key failings in terms of the way valuations were requested, used and carried out during the boom, particularly in relation to the provision of valuation instructions which it found were a contributing factor to the level of property losses by banks.

It found that some valuers on the financial institutions valuer panels did not have the appropriate qualifications and professional indemnity cover. It also pointed to the lack of appreciation of the significance of the valuation document as independent evidence of risk mitigation effectiveness.

According to the report, many bankers did not fully regard the valuation report as a key document underpinning the basis on which they were acquiring the risk.

The Central Bank report did, however, recognise the valuation principles developed by the Royal Institution of Chartered Surveyors (RICS) – the global professional body which works in partnership with SCSI, in accordance with international valuation standards, also known as the Red Book.

The Central Bank recommended that lenders should seek Red Book valuations from suitably qualified valuers when considering applications for loans or reviewing existing loans.

The Red Book contains mandatory rules and guidance for valuers involved in valuations. It contains full procedures for preparing valuation reports including conflict of interest checks, terms of engagement, instructions and the provision of clear reasoning and use of relevant comparables.

The Red Book is a global standard and has been in use in Ireland by chartered surveyors undertaking valuations for lending since 1996.

In April of this year, an Irish chapter of the Red Book which sets out mandatory rules for residential property mortgage valuations was published for the first time. The reason for its publication was to raise the standard of residential mortgage valuations which heretofore were not in place under the Red Book for Ireland.

RICS, in cooperation with the Society of Chartered Surveyors Ireland, recently launched a new scheme called Valuer Registration in Ireland which seeks to minimise the risk associated with valuations. It has already been rolled out in the UK and Europe where it has been well received by financial institutions and was developed in response to the global financial and property crisis.

Essentially, it is a regulatory process on individual valuers to ensure consistent application of the internationally accepted Red Book valuation standards.

In a recent address to the International Governing Council (IGC) of RICS in Dublin, Mr Daly described the introduction of Valuer Registration in Ireland as a welcome means of reinforcing professional standards and raising consumer confidence in the delivery of valuation advice.

This would, according to Mr Daly, “contribute in a practical manner to the sustainable recovery that we all wish to see and that we must all work together towards achieving”.

A valuer who becomes a registered valuer under the scheme undertakes an annual registration, demonstration of ongoing experience and up-to-date knowledge and regular monitoring of their valuation procedures.

The purpose of valuer registration is to provide assurance to clients, including credit institutions, that the professionals they are engaging to undertake valuations of significant assets on their balance sheets are subject to international regulation.

Valuer registration is an additional quality assurance mechanism that will provide confidence to financial institutions and other procurers of property valuations that the professionals they are engaging with are subject to continued monitoring and auditing.

At a time when banks and other credit institutions are seeking to minimise risk and enhance transparency and accountability, valuer

registration offers financial institutions an assurance that asset valuations will be in accordance with the RICS Red Book as recommended in the Central Bank report.

They can also be assured that when dealing with a registered valuer, they are reducing their risk levels by dealing with a professional who is monitored, regulated and audited in accordance with international standards.

It is imperative that the mistakes of the past are learned from, and that the public also have confidence in their financial institutions and the valuations that are carried out on their behalf.

While there is still work to be done, we believe that valuer registration is a step in the right direction.

Sean McCormack is an RICS registered valuer and chartered surveyor and a fellow of the Society of Chartered Surveyors Ireland