RICS notes that the Prudential Regulation Authority (PRA) has now published its second near-final policy statement on the remaining elements of the Basel 3.1 package, which sets out its proposed direction on the implementation of prudent valuation criteria in respect of real estate secure lending purposes in the UK: PS9/24 – Implementation of the Basel 3.1 standards near-final part 2 | Bank of England. A speech by the Director of the PRA, Phil Evans, summarising their approach to Basel 3.1 introduction is attached at the following link: A balanced approach to finishing Basel 3.1 in the UK − speech by Phil Evans | Bank of England.
RICS observes that this statement provides further clarity in respect of The PRA’s requirements and responsibilities relating to adjusting valuations on a prudently conservative basis for secured lending purposes which were introduced and set out in its 2023 consultation document, CP16/22 – Implementation of the Basel 3.1 standards | Bank of England. Importantly in these aspects the policy statement states:
Prudent valuation criteria:
15 responses related to the proposed requirement that the valuation must be adjusted to consider the potential for the current market price to be significantly above the value that would be sustainable over the life of the loan. Respondents requested that the PRA clarify the proposed requirement, and some argued that the PRA should not introduce the requirement due to the complexity of adjusting valuations at individual property level. Two respondents supported the proposed implementation of a prudent valuation approach.
2.231 The PRA agrees with respondents that the proposed requirement to adjust a valuation to reflect the value of the property that would be sustainable over the life of the loan could be complex for firms to operationalise and may lead to inconsistent approaches. Having considered the responses, the PRA has amended its draft rules to remove this requirement.
RICS is now liaising with the PRA to attempt to seek clarity on some drafting points relating to real estate valuations contained within their Near-Final PRA Rulebook: CRR Firms (CRR) Instrument [2024].
RICS also notes that the PRA is amending its rules in respect of the use of “robust statistical methods”, including the use of Automated Valuation Models or indices “where it is prudent to do so” as an alternative to undertaking only physical valuations by a qualified surveyor. Whilst we accept that banks have been using AVMs for various purposes at a portfolio level for some time, we are seeking further clarity from the PRA on this proposal.
Nick Knight, Chair of RICS Valuation Professional Group Panel said:
“The outcome clarifies that there are no major changes in the process for valuers undertaking valuations for secure loan purposes for banks regulated in the U.K. We are grateful that the PRA has accepted RICS’ concerns on this issue set out in RICS’ 2023 consultation response. Although we understand that the EU Commission and European Central Bank are yet to finalise their proposals relating to real estate related prudent valuation criteria in EU Europe (ahead of 1st January 2025 implementation), we note the potential for divergence on this issue between the UK and the EU regulators but await further clarification from the EU Commission.”
A link to our previous Member announcement on this issue is attached below for context:
Implementation of Basel 3.1 and the potential implications for RICS Members May 2023
The timeline for Basel 3.1 standards implementation in the UK is now put back to 1 January 2026 with a 4-year transitional period ending on 1 January 2030.