The role of property valuers
This chapter discusses the evidence received by the committee about
valuers and their role in relation to loans including issues raised by
submitters, views of banks, the roles and actions of peak bodies for valuers,
prudential requirements for valuation of securities by banks and access to
valuation and instructions for borrowers.
The valuation process is generally used at three different points in
time in relation to bank loans:
the initial funding approval process;
during the course of a review of existing facilities as required
under loan contracts; and
during the course of the sale of assets.
The International Valuation Standards Council (IVSC) provides the
following definition of market value that is used by valuers of real property
...the estimated amount for which an asset should exchange on
the date of valuation between a willing buyer and a willing seller in an arm's
length transaction, after proper marketing, wherein the parties had each acted
knowledgeably, prudently and without compulsion.
Business valuers in Australia use a slightly different definition of
...the price that would be negotiated in an open and
unrestricted market between a knowledgeable, willing but not anxious buyer and
a knowledgeable, willing but not anxious seller acting at arm's length.
In 1907 the High Court of Australia in Spencer v. The Commonwealth,
recognised the following four principles for market value:
the willing but not anxious vendor and purchaser;
a hypothetical market;
the parties being fully informed of the advantages and
disadvantages associated with the asset being valued (in the specific case,
both parties being aware of current market conditions.
In discussing the concept of market value in Spencer v. The
Isaacs J indicated that:
... to arrive at the value of the land at that date, we have ...
to suppose it sold then, not by means of a forced sale, but by voluntary
bargaining between the plaintiff and a purchaser willing to trade, but neither
of them so anxious to do so that he would overlook any ordinary business
consideration. We must further suppose both to be perfectly acquainted with the
land and cognisant of all circumstances which might affect its value, either
advantageously or prejudicially, including its situation, character, quality,
proximity to conveniences or inconveniences, its surrounding features, the then
present demand for land, and the likelihood as then appearing to persons best
capable of forming an opinion, of a rise or fall for what reasons so ever in
the amount which one would otherwise be willing to fix as to the value of the property.
Issues raised by submitters
Submitters and witnesses to the inquiry raised a number of issues and
allegations relating to valuers and the accuracy of valuations including:
significant reductions in valuations between loan establishment
and foreclosure or the appointment of receivers;
whether valuers are sufficiently independent from banks and free
from inappropriate influences, such as reduced work, if valuers do not agree
with bank requirements;
the instructions given by banks to valuers and whether those
instructions appropriately request market value and are made available to
the methods used by valuers, including:
changes in the valuation method (such as multi-purpose or
the level of rigour involved with drive-by and desk-top
the practice of requiring borrowers to pay for valuations
requested by banks;
borrowers not being given access to valuation reports;
whether valuations appropriately reflected the value of business
as a going concern, rather than just the assets;
the inadequacy of accountability and dispute resolution in
relation to valuers.
Some examples of the concerns
raised by submitters
An accountant from Queensland, indicated that many of his clients had
encountered similar issues to those listed above:
The issues that this raises does show that banks reviewed
their exposure to a particular area or client type, engaged valuers to look at
this exposure and then used those valuers opinions to orchestrate reasons to
cease lending. The concerns this raises are:
Banks are relying on valuers to justify their actions;
The clients have to pay for these valuations;
Banks often advise valuers as to how they want a property valued
– eg. Fire sale, normal market conditions etc.
There is significant resistance to valuers providing these
valuations to the clients as banks insist it is their valuation – despite the
client paying for them;
The valuer then has all the power, and therefore the risk, as it
is their opinion that is making and breaking deals.
These valuers are only using the property value for sale, and no
valuations are being undertaken on the “value of the enterprise”. The entire
focus is the recoverability by banks and as such, the valuations being used to
make these decisions are understated.
The Tasmanian Small Business Council (TSBC) drew attention to clauses in
standard form loan contracts which seek to deny access to valuation reports and
seek to prevent borrowers from raising disputes against the banks or valuer.
A submitter questioned the independence of property valuations,
informing the committee that in his view:
Financiers access valuations either internally or externally.
However any valuation has to be acceptable to the institution and secondly
external valuers are subject to legal process. In this situation professional
indemnity insurance premiums are prohibitive to valuation competition, so by
financial pressure and the threat of legal process, financiers’ can control all
The committee was advised that different valuation methods may produce
different results. A witness put his views to the committee on the different
valuation methods that valuers may use in some cases, as an 'as is' development
property, as a direct land comparison, as strata title, or as an in-line
Another witness provide an example of strata versus in-one-line valuations:
There was another case...It was a strata development of storage
units. On an individual sale it
was worth about $3.9 million...But the bank instructed the valuer to value it on
one-line and to ignore the strata. So that valuation came in at $1.7 million.
A witness informed the committee that:
...my suggestion is that, given that we have lots of recent
valuations by banks—generally every six months they will revalue your
projects—they are not stale valuations. Copies of valuations are never given to
the borrower even though the borrower pays for them. I think that, if we had
the copy of the valuation, we would know the instructions that were given to
the valuer in the case of all these Bankwest constructive defaults.
A submitter made the following suggestions in relation to valuation
processes, based on its experience:
there should be more recognition of the intrinsic uncertainty of
valuations when they are used to make decisions with significant consequences
an independent dispute resolution process should be available;
instructions to valuers should reflect market value with
reasonable sale periods; and
standards for the qualification and independence of valuers
should be applied.
ASIC informed the committee that in the five years from 1 July 2010 ASIC
received 61 reports of alleged misconduct from people raising concerns about
banks’ treatment of commercial loans that relate to the issues raised in the inquiry’s terms of reference.
ASIC indicated that some of those matters related to changes in valuation of
assets held as security. ASIC ultimately determined not to pursue further
regulatory action or enforcement proceedings against a lender in relation to
these matters. Generally, this was because ASIC’s inquiries did not reveal
sufficient evidence of misconduct on which to base an enforcement action. Some
matters included allegations that property valuers were conflicted, though
further inquiry by ASIC did not indicate any corresponding misconduct by the
receiver with respect to this allegation.
How valuations are used by banks
TSBC argued that the clauses in loan contracts mean that Australian
banks are legally allowed to re-value a secured property at the customer’s
expense. The TSBC alleged that if the valuation shows that the secured property
has fallen in value since the loan was agreed, then the bank has the right to
default the customer and demand full payment of all amounts owing.
The committee was informed about a case where a bank was alleged to have
made inappropriate use of multiple valuations:
After obtaining a home loan for $80,000 seven years prior, Mr
and Mrs X began experiencing financial difficulty which led to Bank Y taking
possession of their property. As mortgagee in possession, Bank Y sold the
property for $50,000. This resulted in Mr and Mrs X owing a shortfall debt of
$50,000. During the mortgagee sale process, Bank Y obtained two separate
property valuation reports from independent property valuers. The earlier
report stated the market value of the property was $60,000, while the later
report valued the property at $150,000. Bank Y disregarded the second valuation
report, and proceeded to sell the property at auction. Bank Y set a reserve
price of $60,000, and sold the property at the fall back price of $50,000. One
week later, a third party offered Mr and Mrs X’s real estate agent $160,000 for
the property. The real estate agent was unaware that the property had been sold
at auction one week prior.
Note: A FOS determination concluded that the FSP did not meet
its obligations to take reasonable steps to determine the value of the property
before selling it.
One submitter informed the committee that their properties were valued
at approximately $5 million, and valued again by the same valuer 12 months later
for $1.2 million less. The bank then advised that the client was outside the
terms of their agreement and they should seek an alternate financier.
The Consumer Credit Legal Service (WA) Inc suggested that financial
service providers should be required to obtain two separate and independent
property valuations and if a significant difference exists between the valuations,
financial service providers should be required to undertake further inquiries
to ascertain the current market value of the property.
Legal Aid Queensland provided an example where an agribusiness banker
engaged a particular valuation firm to conduct valuations in both 2011 and 2012
when it approved increases in loan facilities. These valuations resulted in a
value of around $7.5 million which included improvements valued at $1.9
million. After the borrower experienced cash flow difficulties, the asset
management team within the bank engaged a different firm of valuers in 2013.
This valuer valued the assets at $3.4 million including improvements at $340, 000.00.
Although there were other matters affecting decision making between the
borrower and bank, the reduced valuation provided the bank with justification
to encourage the borrower to sell the property at the greatly reduced price to
'meet the market'.
Rural land prices
The Department of Agriculture indicated that a notable portion of the
correspondence received by the Minister for Agriculture regarding debt matters
raised issues including:
banks refusing to provide property valuation documents to
use of unreasonable charges or fees for compulsory property
re-evaluating properties to ‘engineer’ defaults, despite farmers
not missing required principal and/or interest payments; and
use of single organisations for valuation and receivership
processes, including allegations of using organisations that are known to
An accountant noted that in some parts of Australia significant price
reductions of real property followed extraordinary price increases in the
decade prior to the GFC:
During the 2000s, property prices in Western Queensland
increased by over 300%. By way of example, an average price for open downs country
in the Longreach region was around $35 per acre around the year 2000. Towards
the start of the GFC in 2007/08, prices were being paid around $140 per acre.
The Department of Agriculture informed the committee that the largest land
value declines occurred in northern Australia (Queensland, the Northern
Territory, and the Kimberley and Pilbara regions in Western Australia). Land
values reported in 2013‒14 for some regions in Queensland were as much as
30 per cent below those in 2007‒08, in nominal terms. Much smaller
reductions in land values occurred in the high rainfall and crop growing
regions of northern Australia, and in southern Australia more generally.
Valuing the whole business
Some submitters raised concerns about whether valuers appropriately
considered the value of the whole business as a going concern, rather than the
value of the individual assets. A witness shared his view on how valuations had
These valuers are only using the property value for sale, and
no valuations are being undertaken on the 'value of the enterprise'. The entire
focus is the recoverability by banks and as such, the valuations being used to
make these decisions are understated.
The company was made up, as I said, of 50 different
companies. We were spread across the whole of the North: we were in Cooktown,
Cairns, Mount Isa, Townsville and Mackay, and we had different entities running
in different places. What they would do was sell the equipment. For instance,
we had a bitumen business out at Mount Isa that was spraying something like 10
million litres of bitumen a year, which is very sizeable. The refinery in
Townsville only produces 40 million litres, so we were doing a quarter of the
North's bitumen. What they did was sell all the assets.
Prudential requirements in relation to property valuations
Prudential Standard APS 220 on Credit Quality sets out
requirements for how property to be held as security against loans should be
valued. An authorised deposit taking institution (ADI) must ensure that assets
to be taken as security are accurately and completely identified and documented
in facility documentation. The ADI's credit administration function must ensure
that the relevant legal requirements are met to maintain the ADI's security
position and to provide for its enforcement. Valuation of security must be
undertaken prior to drawdown on any facilities.
An ADI's policies and procedures must provide for regular assessment of
security values so as to ensure that the fair value of security underpinning
provisioning, and any security coverage measures applied to facilities, is
timely and reliably reflects values which an ADI might realise if needed. This
is especially important where facilities are secured by assets that are
susceptible to significant changes in value (for example, commercial property)
or where the margin for diminution of value of security is small (for example,
high loan-to-valuation loans).
In determining the fair value of security, an ADI may utilise the
valuations of suitably qualified internal appraisers or external valuers.
Policies and procedures covering the fair value of security must address the
circumstances in which such valuations would be sought.
In many instances, property is a prime source of security held by an ADI
against facilities it has provided to an entity. As a result, the processes
used to value property in determining the fair value of security are
significant for the measure of an ADI’s impaired assets, provisions and,
ultimately, its capital.
For security held in the form of property, the timing as to when
property will be accessed, and ultimately disposed of, is a crucial issue. Of
particular importance in valuations is the time allocated to market a property.
For purposes of determining the fair value of security involving property, an
ADI must assume:
- a property would be accessed in
the near future;
- the period for marketing a
property would be up to 12 months, although a longer period (up to a maximum of
24 months) may be adopted for specialised or unusual properties when
professional valuers advise that this is appropriate; and
- for the purposes of valuation,
market conditions and thus asset values are assumed to remain static over the
marketing period. To reinforce this point, marketing periods are to be assumed
to have lapsed at the date of valuation (that is, they should be
retrospective), thereby eliminating any possibility for improved market conditions
to be factored into the valuations.
In determining fair values of security, property assets must, unless
otherwise agreed with APRA, be valued on the basis of existing use. Any higher
value related to an alternative use or 'element-of-hope' value arising from
prospects of redevelopment, and any possible increase in value consequent upon
special investment or finance transactions, must be disregarded. In determining
values based on ‘existing use’, care must be exercised in imputing future
income streams (for example, lease payments) which are not already contracted.
A submitter also noted that, in his view, the prudential standards in
relation to valuations would not prevent a financial institution from accepting
a top of the range valuation when selling the facility (money) and reducing the
value to a lower level by instruction at a further time.
It was argued by a submitter that APRA did not investigate borrower
complaints in relation to valuations.
The committee questioned APRA on whether APRA has a role in protecting
borrower's interests. APRA informed the committee that its primary statutory
obligation is to depositors and to financial stability and that it focussed on
systemic issues, rather than individual facilities.
APRA also noted that:
...it is not in our statute right now to look at the bank's
relationship with borrowers. APRA is, right now, not statutorily mandated to
protect borrowers. We are a prudential regulator and, as Neil said, we are
interested mainly in protecting depositors and financial stability. If
parliament were of the mind to have APRA have the responsibility of also
protecting borrowers, that would present us with somewhat of a dilemma in that
we would have a conflict in whose interests are paramount. As you said, there
are other regulatory bodies who have that mandate. If you deposited that
responsibility to a prudential regulator, we would be in a position of conflict
which would be very difficult to maintain.
Views of banks and other bodies
Australian Restructuring Insolvency and Turnaround Association (ARITA)
informed the committee that in its view, valuations are based on point-in-time
assessments, and noted that any revaluation may be based on prevailing
depressed market conditions that may be temporary or later improve.
ARITA also informed the committee that:
...we’re not aware of any improper role of property valuers in
“constructive default” as the terms of reference describe. Of course, there is
often legitimate dispute as to valuation evidence. Valuations are often the
subject of rigorous assessment in court proceedings.
ARITA notes that disputes sometimes arise when borrowers have
an inflated opinion of the value of their asset compared to a realistic current
market valuation. It is important to note that a current market valuation is
based on what an independent, informed purchaser would pay; it is not based on
past value or what amount may have been invested in the asset. Also, the value
of an asset may have been reduced by the activity that led to the asset
the committee that a financial services provider in possession of a
borrower’s property must take reasonable care to sell the property for either
its market value or the best possible price. If FOS believes the financial
services provider in a dispute did not take reasonable care, FOS may award the
borrower compensation for any difference between the sale price and the market
value of the property.
Bankers' Association (ABA) advised the committee that it is standard
industry practice for banks to use preferred lists or expert panels of
independent external valuers to undertake mortgage valuations under strict
industry standards. The ABA added that:
Valuations are based on a point-in-time assessment of
property values and will change with prevailing market conditions.
This process ensures that valuations are provided by skilled
and independent valuers with no coercive influence by the bank. In rare
circumstances, for instance a property located in an isolated area where there
are very few suitably qualified valuers available, a bank may rely on an
internal valuation. The valuer's role is to provide a valuation based on what
is happening in the marketplace and not look to devalue properties. In many
cases, valuers will not know the customer’s debt or reason for the valuation.
The Commonwealth Bank informed the committee that they usually obtain
valuations in the initial funding approval process, review of existing
facilities/term extensions and realisation of assets via sale. In addition,
revaluations during the course of a review of existing facilities arise from
time to time under the terms and conditions of contractual arrangements.
The Commonwealth Bank indicated that valuers used by the bank must:
be registered or licensed (in states where required);
comply with the regulatory requirements governing licensing or
be a member of the Australian Property Institute (API), as a
Certified Practising Valuer (CPV);
comply with annual compulsory training requirements;
comply with the Code of Ethics and Rules of Conduct of the API;
be suitably experienced to undertake required valuations
(generally a minimum of five years experience in their field of expertise); and
have suitable and current professional indemnity insurance cover.
The Commonwealth Bank further advised that processes and standards for
detailed formal written instructions are issued to preferred
valuers to undertake valuation reports;
valuations are to be based on current unencumbered market value
(International Valuation Standards);
valuations must be completed in accordance with API Mortgage
Security Professional Practice Standards and reporting requirements;
valuers must not undertake any valuations where a conflict of
interest may occur;
a director or head of valuations of the valuation firm must
complete (or countersign) valuations; and
valuers must maintain strict confidentiality in respect of
The Commonwealth Bank also noted that in a small proportion of
cases, especially in remote areas where expert valuers are unavailable, the
Commonwealth Bank has relied on internal bank valuations completed by
accredited staff. In these cases, the valuation officer must comply with
Commonwealth Bank policy and measures are in place to manage risk. Where a loan
is determined to be troublesome or impaired, Commonwealth Bank policy does not
permit the use of internal valuations.
ANZ informed the committee that it engages property valuers to assess
value of the security underpinning the loan. This can occur at the initial
approval of the loan, when reviewing existing facilities and when the security
is to be sold. The ANZ framework for the use of valuations in determining fair
market value is underpinned by the prudential requirements for the use of
valuations and international standards and practices on property valuations.
The ANZ stated that its valuation process is independent of sales and lending
decisions, and they use a panel of approved commercial property valuers to
provide independent expert advice to determine the acceptability and value of
property held as security.
ANZ indicated that when it instructs a valuer to determine the current
market value of
a property for a security, the valuer must apply the following definition of
market value from the IVSC:
The estimated amount for which an
asset or liability should exchange on the date of valuation between a willing
buyer and a willing seller in an arm’s length transaction after proper
marketing wherein the parties had each acted knowledgeably, prudently, and
ANZ noted that the above definition places the equivalent emphasis on
the interests of the purchaser and the vendor to obtain a fair market value.
The valuer’s role is to make a prediction of the most likely price a property
would receive if offered to the market on the day of inspection, taking into
account all material factors which may impact on the determination of that
ANZ responded to claims that banks are in a position to engineer
defaults by 'deliberately reducing, through valuation, the value of securities
held by the bank':
ANZ is required under its prudential obligations to ensure
the value of the security of a loan is accurate and the risk associated with
the facility is adequately capitalised. One way to achieve this is through
conducting regular reviews of facilities and valuations of underlying security.
ANZ’s policies ensure that approval of valuations are held at arm’s length from
lending decisions and managed by Risk functions so that the valuation received
is a true estimate of market value on a given day. Of course, once a valuation
is established, other criteria contribute to an overall assessment of achieving
a customer turnaround plan.
NAB also responded to similar concerns, informing the committee that:
To the extent this is suggesting financiers inappropriately
participate in the valuation process, misuse valuations, or otherwise that such
valuations are contrived, this is not a practice that NAB engages in. In our
view, there is no commercial or economic justification for this practice.
Westpac explained that it only uses valuers from a panel of external
valuers that provide an independent view of the value of properties, in
accordance with the bank's valuation instructions and valuation standards. This
includes compliance with the API Valuation Practice Standard and the API
Mortgage Security Valuation Practice Standard. In appointing a valuer for a
particular property Westpac would take into consideration location, type and
value and seek to match with a valuer who has experience in that type of
property and is accredited for that location and value. Westpac also noted that
it requires valuers to provide a sensitivity analysis on the major variable
affecting the valuation.
Westpac also informed the committee that:
The Westpac Group does not engage in practices to
artificially engineer a business default, including revaluation of security. It
would be rare for the Westpac Group to use a decreased loan to value ratio
(LVR) as a sole default trigger to commence enforcement action i.e. when the
Westpac Group accelerates the loan and enforces security, which could include
the appointment of a Receiver and Manager. Enforcement on the sole basis of an
LVR default has not taken place since our merger with St. George in December
Peak bodies for valuers
There are three peak bodies representing valuers in Australia: the
Australian Valuers Institute; the API, which is the largest, and the Royal
Institute of Chartered Surveyors. Most of the valuations done for banks in Australia
are performed by the Australian Property Institute.
This section summarises evidence from the three peak bodies in relation to
their role in supervising the valuation industry.
The Australian Property Institute
The API informed the committee that arrangements for valuers vary across
state and territories. The actual revaluation of a property asset by registered
valuers only occurs in New South Wales, Queensland and Western Australia. In
the other states and territories, it is done by certified practising valuers
and members from the API.
The API, responding to questions on the methods used to conduct
valuations, suggested that the way valuation of real estate occurs is a matter
for the banks and financial institutions.
The API advised the committee that legislation in three states compels valuers
to act independently, and in the remaining states and territories, the duty on
valuers to act independently comes from the API's rules and guidance notes.
The committee questioned the API at length about its role in the event
that a valuer is inappropriately influenced or provided with inappropriate
instructions. The API did not appear to place any obligations on valuers to
report situations in which they are asked to breach the API code of conduct.
When asked if there was any recourse available to an individual valuer if they
are inappropriately influenced in relation to their valuation the API replied
In the general guidance notes and what we call the technical
notes in the institute, if a valuer receives instructions which he does not
agree with or believes are in contravention of the ethics of the institute, he
is instructed to refuse the instructions. It is as simple as that.
The Australian Valuers Institute
The Australian Valuers Institute (AVI) informed the committee that they
discourage their members from taking work from banks on the basis that it puts
valuers at considerable risk :
Valuers get sued all the time. It is not unusual for the
insurance companies to step to one side and leave it to the valuer to sort it
out. They lose their homes at times. One particular valuer...has basically lost
everything. Any valuer who is doing work for banks and cutting corners is
We instruct all our members not to work for banks or financial
institutions, because in this day and age you are almost underwriting the loan.
The AVI indicated that as a result of the above circumstances it is
common for valuers to put a conservative value on properties in order to avoid
being sued. The AVI informed the committee that:
...there is a sort of a general feeling amongst valuers that
there is a 10 per cent leeway that you are allowed before you get sued. Some
lawyers have told me it is 10 to 15 per cent, but 10 per cent is the general
figure. So if a house is worth $1 million and you want to put a conservative
value on it, you might value it at $910,000.
While individual valuers are required to resist pressure, the AVI
informed the committee that it is very common for valuers to be under pressure
from parties involved with valuations to make the valuation favourable to one
or other of the parties:
In the valuation industry 80 per cent of the time you have
people trying to sway you one way or the other. In a divorce situation where
the husband is buying out the wife, he wants it at a certain price and the wife
wants it at another price. As a valuer you are constantly under pressure from
one side or another to lean it one way or the other. If you are doing a stamp
duty job you are under pressure to make that value conservative to reduce the
stamp duty for the person. On a capital gains job the instructing parties want
it the other way. It is up to the valuer to resist those pressures and simply
value the property as it is valued.
The committee notes that unlike the API, the AVI has a process for
valuers to raise concerns about inappropriate pressure from parties to
valuations however in order to resolve the matter the only remedy available to
the valuer is to take the matter to court.
The AVI also acknowledged that it had not attempted to address
situations in which a valuation company or valuer was under pressure to comply
with banks' instructions, because a large proportion of their work came from
banks. The only option available to the AVI would be terminate the membership
of a valuer who succumbed to such pressure.
The Royal Institution of Chartered
The Royal Institution of Chartered Surveyors (RICS) has published a
professional standards guide (consistent with international standards for valuations)
that is commonly known as the red book. RICS-registered valuers will be
required to adhere to provisions of the red book. RICS noted that the red book
guidelines associated with the international standards would have much in
common with the API guidelines, however country specific requirements, such as
native title, may vary.
RICS informed the committee that it has an independent complaints
RICS will consider any complaint received from a member of
the profession, a concerned stakeholder or an individual. Complaints are
handled at arm's length by an independent conduct and appeals committee. To
demonstrate the independence of the committee, it is chaired by a nonmember of
the RICS, and other members are drawn from within and without the organisation
and profession. Disciplinary action can involve the suspension or termination
of RICS membership. It could also involve the levying of a fine or the
temporary suspension of a member or firm from conducting particular activities.
This disciplinary action applies to all members of the RICS, regardless of the
nature of the qualification, be they a valuer, land surveyor or a building
RICS stated that it had consulted its members and found no evidence of authorised
deposit-taking institutions acting improperly in the drafting of instructions
given to valuers so as to deliberately alter the value of property to the
benefit of either party.
In relation to variations in valuations, RICS noted that the level of
variation depends on property type. For example, CBD office buildings have
tended to show less variation than development land or residential
When questioned by the committee on how to address the issue of valuers
being constrained to work within the instructions and assumptions provided by
the bank, RICS indicated that the only way to protect borrowers was to
strengthen foreclosure laws:
Only in strengthening the law around foreclosure and the
regulation around foreclosure. Generally, following most property collapses we
have had over the last 30 years we have strengthened the regulation around
unlisted trusts, listed trusts, property syndicates. As government
strengthens the legislation and strengthens the regulation, some operators will
find further ways around it.
RICS stated that whether or not copies of valuations were provided to
borrowers was a matter for banks to decide.
Access to valuations and instructions
The committee actively sought responses from banks and industry bodies
on their views in relation to imposing a requirement for banks to provide
copies of valuations and instructions to customers.
In December 2015, the Commonwealth Bank suggested that across the
industry, the practice could change to one whereby, if a valuation is obtained
by a financial institution, then a copy of the valuation is provided to the
customer because the customer is paying for that valuation.
The ANZ suggested that there is a case to be made for development of an
industry-wide guideline on the role and use of valuations to make sure that the
valuation process is transparent and easily understood by customers.
ANZ indicated that it uses external valuers on most occasions, and where the
customer pays for that valuation, the bank provides a copy of that valuation to
It is our practice rather than a requirement. We do that and
the valuer typically...write what the bank was asking for at the start of the
valuation so it is clear under the circumstances of doing the valuation. So it
is quite clear to the customer.
We would be very happy if it were put in the Code of Banking
Practice and, as you sign up to the code, you are obliged to do that and if you
do not do that, then customers should complain. I think that is quite right.
NAB indicated that it would not have an objection to providing borrowers
with a copy of the valuation and the instructions to the valuer.
NAB also informed the committee that it gives customers the option to obtain
further valuations if they are concerned about the initial valuation by the
Westpac informed the committee that its current policy is not to provide
the valuation to borrowers. However, Westpac indicated that:
on occasions it will provide the valuation upon request for
specific purposes, if there is agreement that the valuation has been provided
for the Bank’s purposes;
it is common that there is a reasonable level of information
exchange between the Bank and the customer in regards to valuations, and in
some instances the customer gets full access to the valuation;
if there is a dispute about the valuation an additional valuation
could be sought from another panel valuer and in some cases, the bank has paid
for this alternate valuation; and
if a company is in receivership, the receiver is the agent of the
company and the directors do not have any standing to require copies of the
valuations of company owned property assets. For third party security e.g.
provided by directors to support guarantees, the bank could provide a copy but
it would need to have the agreement of the valuer and be qualified given that
it has been prepared under bank instructions and for bank purposes.
ASIC informed the committee that it is unlikely that a requirement to
provide instructions and a copy of the valuation report to borrowers would have
a significant impact on the cost and availability of credit to business, and is
worthy of further consideration.
Recommendations of the post-GFC banking inquiry
In November 2012 the Senate Economics References Committee
concluded its inquiry in to the post-GFC banking sector. In its report, the committee
called on the ABA to develop a code of practice specifically related to the
practice of lending to small business, recommending that in relation to
valuations the code should require:
any initial valuation reports associated with the purchase of a
small business be relied on
by the bank for a reasonable amount of time, such as for the first two years of
the loan, unless a major defined shock or event occurs; and
be automatically provided with copies of valuation reports that they have paid
for or which the bank intends to rely on to demonstrate that the borrower is in
default, and that all instructions given by banks to valuers be provided to the
borrower on request.
The Senate Economics References Committee added that:
Failure by the ABA and the banks to develop an appropriate
code of conduct for small business lending may strengthen the case for more
prescriptive government regulation in this area. Given the arguments from the
sector about the cost and burden of added regulation in general, the committee
is of the view that if banks genuinely have these concerns they have both the
obligation and opportunity to demonstrate that the sector takes concerns about
small business finance issues seriously and is willing to proactively develop a
stronger self-regulated solution.
Committee view on the role of valuers
In this section the committee puts forward its view of the following
provision of valuation reports and instructions to borrowers by
how instructions for valuers are developed within banks; and
dispute resolution for valuations associated with loans.
Provision of valuation reports to
The committee is deeply concerned that over three years have elapsed
since the conclusion of the post-GFC banking inquiry by the Senate Economics
References Committee in which a number of relevant recommendations were made to
improve banking practices. Since this time, the banking industry has not
addressed matters as simple as providing borrowers with copies of valuation
The current inquiry into impairment of customer loans has amply
demonstrated that the provision of valuation reports to borrowers has not been
written into the Banking Code of Practice, or become universal practice by
This is a disappointing outcome given that the Economics committee
foreshadowed that if the ABA and banks failed to progress such recommendations,
this lack of action would strengthen the case for more prescriptive government
regulation. The committee is therefore of the view that if banks and the ABA do
not address this matter in their common practice and in the Banking Code of
Practice by the end of 2016, the government should bring forward appropriate
legislation or regulation to require banks to provide copies of valuation
reports and valuation instructions to all borrowers (not just retail and small
business borrowers) as soon as the reports are received by the bank from the
Instructions to valuers
A common theme in evidence presented to the inquiry was that valuations
at the time of loan establishment were high or optimistic and that valuations
at the time of review or dealing with financial difficulties were low or
pessimistic. The committee acknowledges that market conditions contribute to
such perceptions as there is often more enthusiastic buying in a rising market
that a falling market.
However, the committee considers that evidence presented to it
identifies that there is also the potential for lending departments in banks to
be more optimistic about valuations than credit management departments. While
the committee is not necessarily alleging deliberate behaviour on the part of
banks, it notes that an optimistic outlook on prices ¾whether driven by a relationship manager just wanting to see a
local family business succeed or due to remuneration schemes that provide
incentive for employees to write new business¾could
lead to insufficient critical assessment of valuation instructions and
valuations. Similarly, a pessimistic outlook could lead to an overly critical
assessment of valuation instructions and valuations.
The committee questioned banks on whether incentive arrangements could
contribute to lending more than necessary and foreclosing more than necessary.
The Commonwealth Bank and ANZ argued that they did not.
However, ASIC informed the committee that:
The kinds of rules that exist in the financial advice space,
however, which restrict commissions and other forms of conflicted remuneration
do not extend to consumer credit. So the restrictions on commissions do not
apply if someone is getting a mortgage, a credit card or a personal loan;
institutions are able to remunerate their staff and their distribution channels
in the way they want to. Those arrangements do need to be disclosed to
consumers, generally speaking, but the institutions themselves have the ability
to structure those arrangements in whatever way they wish to.
The committee therefore considers that it is vitally important for banks
to ensure alignment between their lending and credit management departments,
particularly in relation to the preparation to instructions to valuers and the
use of valuations in decision making about the viability of loans.
The committee is therefore recommending in chapter 2 that appropriate
legislation and regulations be put in place to:
require officers from lending and credit management departments
to provide consistent information to borrowers, including:
copies of valuation reports and instructions to valuers; and
copies of investigative accountants' reports and instructions to
investigative accountants and receivers;
ensure that there are industry standards for nationally
consistent valuation instructions and valuation reports; and
require lending officers and credit management officers to
negotiate a single set of instructions to be provided to a valuer both at
initial lending and in the case that the loan is presenting risk to the bank.
Dispute resolution for valuations
associated with loans
From the evidence presented to this inquiry, the committee is concerned
about dispute resolution arrangements for valuations in relation to loans from
the availability of appropriate dispute resolution for valuations
produced by valuers; and
the availability of appropriate dispute resolution for valuation
instructions issued by banks and the compliance of banks with prudential
requirements for valuations.
Dispute resolution for valuations
produced by valuers
The committee questioned the three peak bodies for valuers about their
arrangements for ensuring compliance and hearing complaints or disputes in
relation to valuations. RICS described what appeared to be a well-defined
compliance and complaints handling system, however, RICS presently only covers
a small part of the market for valuations related to loans. The committee noted
that AVI has a more informal complaints system, and that AVI indicated it was
actively discouraging its members from working with banks. API, which has the
greatest market share, indicated that it used the dispute handling system under
the relevant state based registration schemes. The committee notes however,
that state based registration schemes only in exist in three states and one of
those states is considering removing the registration scheme.
The committee is concerned that there are gaps in the availability of dispute
resolution processes in relation to valuers, and in fact, some of the peak
bodies acknowledged that they did not have processes to require valuers to
report instructions from banks that breach the relevant codes of conduct for
In addition, there appears to be little prospect that the existing
limited dispute resolution arrangements are publicised well enough for
borrowers to be aware that their disputes can be heard in some cases. Combined
with the lack of access to valuation reports and instructions, as discussed
above, this leaves borrowers in a very difficult situation.
As a result the committee can only conclude that the valuation industry
does not have appropriate compliance and dispute resolution arrangements in
place for valuations associated with loans. In chapter 2 the committee makes
recommendations to provide for dispute resolution to apply to valuers where
Dispute resolution for prudential
requirements relating to valuations
As noted earlier in this chapter, Prudential Standard 220 sets out
substantial requirements for how ADIs must value property held as security for
the role of the ADI credit administration function;
regular assessment to ensure fair value, especially for
commercial property or loans with high loan-to-value ratios;
a requirement for policy and procedures relating to circumstances
in which valuations are sought; and
in determining fair value the ADIs must take account of:
timing of property disposal if required; and
marketing periods up to 12 months or longer periods for
specialised properties or based on advice from valuers.
Evidence put to this inquiry suggests that cases may exist where the
above requirements are not met. However, many borrowers would not be aware that
such requirements exist. APRA's position is that it only considers systemic
issues; it is not mandated to consider the relationship between banks and
borrowers; and it may have a conflict of interest if it did consider the
relationship between banks and borrowers.
The committee has therefore formed the view that effective arrangements
for oversight or dispute resolution of prudential requirements in relation to valuations
for loans are not in place. There is what seems to be an appropriate standard
in place, but there is no way of ensuring that the standard is applied, or that
borrowers are able to raise concerns about its implementation. While APRA
argues that other agencies have responsibility for protecting borrowers
it would be unusual for another agency to be responsible for providing
oversight and dispute resolution for prudential standards under APRA's
jurisdiction. The committee does not wish to make specific recommendations on
which agency should provide oversight and dispute resolution for borrowers in
relation to Prudential Standard 220. However the committee does suggest that
the government should ensure that appropriate oversight and dispute resolution
is in place.
The committee notes recent media reports which allege that banks are
bullying valuers into accepting below cost fees, strengthening the need for
greater oversight of the relationships between banks and valuers. The report
indicates that the Australian Property Institute has raised their concerns with
ASIC and the ACCC.
The committee recommends that the Parliamentary Joint Committee
on Corporations and Financial Services conducts an inquiry to examine the
regulatory environment for valuers with a view to:
the industry to improve ethical and professional standards for valuers;
transparency and independence within the industry; and
them from being captured by banks.
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