Red Book UK National Supplement

To make valuation governance amendments resulting from the Valuation Review and various technical updates listed on this page in respect of public sector, financial reporting and residential content.

The update to the Red Book UK Supplement was published on 19 October 2023 and came into effect 1 May 2024. It applies to all valuations where the valuation date is on or after this effective date. Specific dates relating to the new rotation policy for some regulated purpose valuations are referred to in responses to questions in the rotation section below.

(a) Subject to UK jurisdiction can be taken to mean where the performance of the valuation contract is subject to the statutes, rules and regulations of the UK and also of relevance is the jurisdiction in which any claim in relation to the valuation could be brought. 

(b) The Isle of Man, Jersey, Guernsey and the Republic of Ireland are not part of the UK though reference should first be made to point (a) above in terms of whether the Red Book UK National Supplement is relevant to valuations related to these jurisdictions.

No. Residential mortgage valuation advice was previously contained in VPGA 11 of the Red Book UK Supplement effective from 2019 and as Appendix 10 of the 2014 (updated April 2015) edition. The newly updated VPGA 11 sets high level principles for residential valuation as a whole but does not go into significant detail in respect of residential mortgages. RICS is currently in the process of developing a new residential valuation guidance separate from the Red Book UK Supplement for publication later in 2024. In the interim valuers can still refer to the previous guidance.

Following feedback from industry consultation, we have exempted public sector valuation for financial reporting from the UK VPS3 ‘regulated purpose’ definition. This is because a legislative and regulatory framework exists for the public sector, and some valuations are undertaken internally. We recognise a tailored approach is needed for governance and rotation concerning valuations undertaken for public sector-related investment properties and have commissioned a workstream to review these standards. This work will focus on examining current RICS guidance requirements in respect of valuer independence and objectivity in the UK public sector (including those undertaken by in-house teams), and expectations around valuer’s culture and behaviours, particularly in relation to the valuation of local authority investment properties for financial reporting purposes. We will work closely with key public sector stakeholders to deliver a practical and public interest-oriented approach.

The answer to this depends on factors such as funding, organisational structure and how the assets being valued are owned. In general terms universities are, in many cases, not public sector and public colleges (post-school, 16-18 further education colleges as opposed to university colleges) are often public sector. The Office for National Statistics (ONS) classifies public sector properties and provides further information that may be relevant to answering this question. As part of this classification, further education colleges in England were re-classified as part of the public sector in November 2022 (colleges in Scotland and Northern Ireland are already part of the public sector. Colleges in Wales remain in the private sector). UK universities are currently recorded by ONS in the private sector however they are currently undertaking a classification review on universities.

Universities and colleges may be not-for-profit or charitable institutions – these are not, by default, exempt from UK VPS 3 and the individual circumstances should be reviewed.

RICS does not typically regulate client firms but does regulate RICS members working in those firms, who are required to follow relevant standards and adhere to our Rules of Conduct. RICS is also developing a client guide to support clients and valuers in commissioning and receiving valuations. The proposed client guide is intended to establish a basis for a strong relationship between clients and valuers, based on ethical principles and building mutual trust. The guide will help clients and valuers to understand the respective roles that they should play in instructing valuations of investment property and how these interact. The guide is scheduled to be published later in 2024.

The changes to UK VPS 3 regulated purpose valuation governance are driven by the recommendations in the Valuation Review. Peter Pereira Gray’s report made special mention of the necessity to ensure that any changes did not unfairly impact SMEs operating in this area of work. RICS has engaged with SMEs to understand potential impacts and the final standards include measures to make sure impacts are as proportionate as possible.

Valuation for secured lending is not included as a regulated purpose valuation and is therefore excluded from the UK VPS 3 regulated purpose valuation governance requirements (which include mandatory rotation). Mandatory Red Book Global Standards governance requirements (PS2) apply. The advisory Red Book Global Standards rotation policy applies (to rotate valuers at intervals not exceeding seven years).

The Red Book UK Supplement UK VPS 3 defines large companies as those that do not qualify as a micro entity, small or medium company under the Companies Act 2006 (sections 384a to 34b, 381 to 384 and 465 to 467). This is generally those that have two or more of the following: 

• Turnover more than £36 million 
• Balance sheet total more than £18 million
• Number of employees more than 250

The Companies Act 2006 also contains relevant information about the financial year(s) to be considered.

Amendments to the Red Book UK National Supplement establish specific new governance standards under UK VPS 3.3, developed following feedback from industry consultation. The new governance rules introduce a compulsory rotation cycle for valuation firms and responsible valuers valuing an asset (as opposed to for example, the client’s parent company) for regulated purposes. The new rotation requirements include:

• a maximum single engagement period of five years
• a maximum period of ten years before the rotation of a valuation firm - this might include multiple engagements
• a maximum period of five years before the rotation of an individual ‘responsible’ valuer
• a minimum three-year break after rotating off an engagement
• a two-year transition policy (simplified from the consultation version)
• where there are truly exceptional circumstances, a carefully controlled option to deviate from the requirements, including  notification to RICS Regulation.

A process map illustrating the rotation policy can be found here. 

Note responses to some more specific rotation questions are included below.

The changes concern those involved in instructing or undertaking regulated purpose valuations upon which third party reliance is placed, such as for example, financial reporting, takeovers/mergers, and collective investment schemes. Secured lending valuation (which includes residential mortgage valuation) and public sector financial reporting valuation are excluded.

In respect of valuations for financial reporting under UK VPGA 1, the additional provisions are only applicable in respect of assets owned or part owned by entities whose transferable securities are admitted to trading on a regulated market or large companies (i.e., those that do not qualify as a micro entity, small or medium company as respectively defined in sections 384a to 384b, 381 to 384 and 465 to 467 of the Companies Act 2006).

The additional provisions also relate to the assets held by charities but only in respect of those charitable organisations that are also defined as large companies or admitted to trading on a regulated market.

The transition policy included within UK VPS 3 for the rotation policy, seeks to provide valuers and clients with a reasonable timescale to transition of a maximum of two years from 1 May 2024 (subject to individual engagement terms – refer to the full policy).

The rotation policy applies to certain regulated purpose valuations, effective from 1 May 2024. It considers the period for which a valuer and valuation firm have valued the asset(s); this consideration may extend back prior to 1 May 2024. It is important to note the test applies to the period for which the valuer and valuation firm have valued the asset(s) – which may be different to the period for which they have undertaken work for the client.

It excludes public sector financial reporting and is only in respect of the valuation for financial reporting under UK VPGA 1 of assets owned or part owned by entities whose transferable securities are admitted to trading on a regulated market or large companies (those that do not qualify as a micro entity, small or medium company as defined in the Companies Act 2006).

Not necessarily. Valuations undertaken for internal purposes only are exempted. However, regulated purpose valuations undertaken by internal valuers that a third party (such as a regulator or client) may rely on, may fall within the scope of the rotation policy in certain cases – such as where the purpose is financial reporting under UK VPGA 1. Furthermore, the firm (or organisation) the internal valuer works for may fall within the rotation policy also. Public sector financial reporting valuations are excluded.

The valuer rotation policy applies to the responsible valuer. It is understood that multiple valuers and other professionals can be involved in the valuation process, and firms should, where possible, consider appropriate rotation of others involved.

Responsible valuer is a term adopted from the Red Book Global Standards. The terms of engagement and reporting requirements mandatorily require the ‘Identification and status of the valuer’ and a statement confirming: ‘that the valuation will be the responsibility of a named individual valuer.’ This is the responsible valuer. Note sometimes internal and external governance policies put in place by a valuation firm and/or agreed with their clients require more than one signatory to a valuation. This does not conflict with the RICS requirement set out above so long as a named individual valuer can be identified as ultimately responsible.

The policy applies in certain cases from 1 May 2024. Note also that it is the point at which a valuation is undertaken that the test of time valuing the same asset(s) is applied, which may be different to the time when, for example, a master contract or service level agreement is renewed or agreed.

The answer to this is subject to individual circumstances and may be different in light of the nature of the amended corporate structure, contractual arrangements etc. 

UK VPS 3.3 states: ‘In order to undertake the valuation, the responsible valuer must be able to confirm to the client in agreed written terms of engagement (as an addition to VPS 1) that the period for which the valuation firm has valued the asset(s) for the same regulated purpose does not exceed ten years and will not have exceeded the period by the completion of the engagement.’ 

The valuation firm refers to the firm being engaged to provide the valuation service. Note there is also a valuer rotation policy which is not altered by a change in firm.

A valuer must be competent and experienced to complete the work to the required standard as a first principle. There may be circumstances where a firm will need to consider whether they can continue with a valuation engagement if they do not have another competent and experienced responsible valuer to rotate to. A firm should not assume that rotation of the instruction to another firm will result in a responsible valuer who is not competent and experienced.

There may be circumstances where the mandatory rotation policy applies to valuations for financial reporting under IFRS and UK GAAP. This is subject to the individual valuation circumstances and appropriate professional judgement.  

In terms of jurisdiction, the Red Book UK National Supplement ‘sets out specific requirements, together with supporting guidance, for members on the application of the RICS Valuation – Global Standards (Red Book Global Standards) to valuations undertaken subject to UK jurisdiction.’

The UK VPS 3 Regulated purpose valuations: supplementary governance requirements apply to: valuations for financial reporting under UK VPGA 1 (excluding public sector…). UK VPS 3.3 covering rotation applies to a subset of the above, in terms of financial reporting specifically: 

• ‘valuations for financial reporting under UK VPGA 1, excluding public sector and only in respect of assets owned or part owned by entities whose transferable securities are admitted to trading on a regulated market or large companies (those that do not qualify as a micro entity, small or medium company as defined in section 381 to 384 of the Companies Act 2006)’

UK VPGA 1 is referenced as the measure for the type of financial reporting covered. UK VPGA 1 covers ‘Valuation for financial reporting: general matters’ and refers to both IFRS and UK GAAP financial reporting.

Valuers and their clients will make decisions about whether, in their professional judgement, there are exceptional circumstances which justify a deviation from the rotation policy. These decisions must be notified to RICS Regulation, including the approval of an independent client party and responsible principal. This will allow RICS Regulation to monitor these notifications and take action if notifications give rise to concerns. RICS will not prescribe exceptional circumstance scenarios, which should be discussed with appropriate client parties, with professional judgement applied in advance of instructions being accepted.

The rotation policy is designed around the asset and there are no specific considerations for later acquisitions or the proportion of assets in a fund within the standards. There possibly would therefore need to be rotation in respect of the single asset in this example.

Red Book Global Standards VPS 1 paragraph 3.2 point (b) requires terms of engagement to include identification of the client or clients, which is ‘confirmation of those for whom the valuation assignment is being produced’. It also refers to ‘representatives of the client’. Any individual identified in this process is an instructing client party. Where the client(s) or representative(s) of the client include firms or organisations – any employee of those firms or organisations who would receive a direct fee or benefit as a result of the valuation, including, where relevant, its comparison to performance indices or other benchmarks should be considered as instructing client parties for the purposes of the above section. 

The level of detail required to be included in the terms of engagement and valuation report is for the agreement of the valuer and client(s), subject to appropriate professional judgement and any other relevant standard or regulation. It should as a minimum explicitly reference that the valuation has been instructed by client parties who receive a direct fee or benefit as a result of the valuation. Note the minimum requirement is to confirm whether this is the case – not to name individuals or detail the fee or benefit. This information can then be considered by intended users of the valuation and aids with transparency. The statement should not be seen as undermining or giving uncertainty to the valuation conclusion but should be presented as a governance measure.