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Parliamentary Joint Committee on Corporations and Financial Services
18/11/2015
Impairment of customer loans

RAYNER, Mr Ken, Member, API Submission Committee, and New South Wales Divisional Councillor, Australian Property Institute, New South Wales Division

SHEEHAN, Professor John, Chair, Government Liaison, and Past President, Australian Property Institute, New South Wales Division

CHAIR: The committee welcomes representatives of the Australian Property Institute. Thank you for attending today's hearing. Would you like to make a short opening statement before the committee proceeds to questions?

Prof. Sheehan : No doubt you have got a copy of our submission of 14 September. There are just a couple of things that I wanted to draw your attention to. If I take you to page 4, section 1A, where we answer your question from the terms of reference, the point we made there, as a committee, is that the way in which the revaluation of real estate occurs is a matter for the banks and financial institutions. The actual revaluation of a property asset is one that, effectively, is done by registered valuers, only in New South Wales, Queensland and Western Australia—this particular class of person. Ken and I, for example, are registered valuers, in New South Wales legislation. In the other states it is done by certified practising valuers, CPVs, members from the Australian Property Institute. Ordinarily, CPV members of the institute—both in those three states I mentioned that do have statutory registration, and also in the other states that do not—tend to prefer CPV members of the API.

I mention that because whatever the policy of a bank or financial institution might be in relation to the setting of a loan-to-valuation ratio, or to the setting of whether or not they believe a borrower is in default, is not something that the valuer is involved in. The valuer is called upon to assess the actual value of the property at a particular time by the bank or financial institution. That is really all I wanted to say at this stage—it is restated through there. I am happy to answer your questions.

CHAIR: A number of witnesses, one in documentary form, has given us examples of where the bank has given instructions or expectations to the valuer. We even had one of the banks here today admit that they do not give instructions but they expect both a market valuation and a fire sale valuation. In other words, they are looking for a range of values, including the lowest possible value. Could you talk to the committee about your experience for registered valuers as to how many or how often they receive directions, instructions or expectations from the bank about the nature of the valuation they are expected to provide.

Prof. Sheehan : The committee took the view that, in response to whatever the instructions to a valuer employed by a bank, or under contract to a bank, might be, in terms of revaluation, the valuer, under the legislation in the three states, still has to act independently. In the other states the valuer is acting independently, in accordance with the rules and the way in which the institute puts out guidance notes. Your question looks at the question of whether a valuer might be asked to talk about an open market valuation and then, secondly, a valuation on the basis of—I do not really like the word 'for sale'—whether the property were to be sold in 30 days.

One of the difficulties with that is that it is fairly obvious that, where the time taken to sell a property in a particular market might be three months, in some markets, like there are at the moment, properties are turning over very quickly once put up for sale. That sets the difference to what the bank might require in terms of a very quick sale—in other words, as I said, 30 days. It is very obvious that there is going to be a difference in the value in cases where a property is for sale for perhaps three months to achieve a market value as against simply putting it up for sale under mortgagee-in-possession, on auction or something like that.

CHAIR: Under section 420, there is an obligation for the receiver to get the maximum value that is possible given the market conditions. As people who value, do you give an indication to a receiver, or a bank in this case, that a property, if the sale were forced within 30 days, would be in this kind of range, but potentially over three to six months it would be another amount? That is the first question. Second, a number of witnesses have indicated that they have had developments where they have built 30 or 40 individual lots and sold by lot. One witness this morning said that the property sales realised, I think, $25 million, but, sold as a line item, it was less than half that price. Are you requested to give values on both individual sale as well as, if you like, job lots or single-line prices?

Prof. Sheehan : It depends on the instructions that are given by the bank. The bank might say, 'We have 10 properties and they are held by'—in the bank's view—'a defaulting borrower, and we want you to advise us what the sale price might be for a sale in one line.' That has been in the literature over many years in relation to property economics, where there is a discount, obviously, if a bundle of properties held by one owner is put up for sale as a sale in one line. That is definitely in the literature.

As to the first question, it is not unreasonable for instructions to indicate whatever they want it to be to the valuer in terms of 'Provide us with advice—what it would be if it were sold within, say, 30 days' or, as you say, it might be: 'What would be the market price if it were in normal market conditions pertaining at the time?' Writing the instructions is in the hands of the banks, but I would say to you that the valuer, by law in three states and also under the institute's own ethics, cannot be influenced by the bank if the valuation is on the analysis of the sales X, and the bank might, for some reason, want to have a different answer. That is for them. The value provided by the valuer is going to be independently provided.

CHAIR: Is there any recourse an individual valuer can have through whichever association if they are leant on? We have documented evidence of one valuer who the bank came back to and said, 'We think that's too much. We'd like a lower valuation,' and the valuer refused to provide it. There were about two or three iterations of this. In a case like that, where there is a clear attempt to influence the professional judgement of a valuer, is there any recourse that they can have back through a professional association to raise this as an issue, either through APA or the Code of Banking Practice?

Prof. Sheehan : 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.

CHAIR: 'Refuse' is one thing. We keep getting assured by everyone that they work under codes of practice and ethical codes and therefore the consumer is protected, but what we see again and again is that those codes appear to have limited application and that breaches can occur. In this case, a breach I think occurs when a bank leans on a valuer, but if the valuer does not flag that back through some mechanism, then the system falls over.

Prof. Sheehan : Can I just respond to that? The valuer is in a special position. He is providing independent advice. I have often used the example that there are two professional groups in Australia who are very much at risk, in terms of not fulfilling their professional standards: doctors, because if they make an error you can see the error; and, of course, in the case of valuers, if they go against the market advice they are getting, in terms of their analysis, and the property subsequently is sold at a price that is a lot different to what they assessed, they are also at risk. Professional indemnity insurance for valuers is very high for that very reason.

Mr RUDDOCK: At risk of what?

Prof. Sheehan : They are at risk of contravention of the institute's own guidelines.

Mr RUDDOCK: The institute has dealt with people who have been in contravention of its guidelines.

Prof. Sheehan : Over the years. I am not privy to where there have been complaints raised against a valuer, but the institute has complaint procedures and has had them ever since we began in 1926.

Mr RUDDOCK: I am a member of a professional society. I know we have standards and I know that there are many of my colleagues who never observe them. I think the mechanisms that we set up to deal with them, particularly with appeals to administrative tribunals and so on, mean that nobody ever really pursues it; that is what I think. Could you assure me that every valuer would never be influenced at the prospect of getting more jobs if they gave valuations of a particular character to those who are the only ones who can request it—that is, the banks?

Prof. Sheehan : I will take the first bit, first of all. There is a rigorous training program of valuers, both at the universities and subsequent to that.

Mr RUDDOCK: There is for lawyers too.

Prof. Sheehan : That is right. I cannot comment on the fidelity fund for the lawyers but, in the case of valuers, they are very much at risk, in terms of people attacking them because, as I said, the value may come in lower or higher—whatever the instructing party might be unhappy about—and that is why valuers are extremely cautious when they do their valuations. We call them sworn valuations. It is simply because the insurers, the providers of professional indemnity insurance, recognise that the valuers are in an area where they are an easy target and so, consequently, they are extremely cautious.

Mr RUDDOCK: And no valuer would ever succumb to any other approach.

Prof. Sheehan : The second question was whether or not a valuer would succumb to the pressure, which I think is what you are asking me. If a valuer did he would be in contravention of the institute's ethics; it is as simple as that.

Senator WILLIAMS: What would happen then?

Prof. Sheehan : We have ethics complaints procedures and if someone raises a complaint against the valuer—and they have been raised over the years, at different times—they are dealt with in those procedures. They are quite complex, as they would be in other professions—for example as I would imagine the Law Society is.

CHAIR: To summarise that, whilst you are indicating that they have a professional obligation to give a fair and independent valuation, they are constrained by the instructions that are given by the requesting agency.

Prof. Sheehan : Yes, but they do not have to accept those instructions. There have been a number of occasions over the years—

CHAIR: They do not have to but, generally speaking, would.

Prof. Sheehan : Only if the instructions were reasonable.

CHAIR: If we wanted a fire-sale value or an open-market value, would that be considered a reasonable instruction?

Prof. Sheehan : If the instructions are laid out clearly, saying we want to have a valuation of a property, whatever property it might be, on normal market conditions— and then we also want to have a valuation on the basis, for example, of a 30-day offering for sale and, say, settlement—that would set down, clearly, the instructions for the valuer.

CHAIR: We have seen consistent evidence, through the inquiry, that at the point of writing a loan the valuations are nearly always far more optimistic, whereas the valuations at the point where they are sending in receivers are far more pessimistic and conservative. In your experience is that just the basis of the instructions that are given, that a bank would say, 'We want the open-market value and the potential value of the land'? Is that the kind of instruction that would give that more optimistic value?

Prof. Sheehan : I wish I could give a very succinct answer to you on that. The scenario you set—in fact it is in our submission here—is that a borrower approaches a bank or financial institution and real estate is provided as security for the loan. There are obviously going to be other sources of support for the loan—the income-earning capacity of the company or the borrower, or whatever. But in those situations, a borrower is dealing with the bank at a particular time when the loan-to-valuation ratio might be whatever it is. In very buoyant times banks and financial institutions might have a loan-to-valuation ratio which, for argument's sake, might be 70 per cent. In other words, you can borrow 70 per cent of the asset. As time goes on, even with just a sample loan, all of a sudden the market changes over a matter of months, or even over a couple of years, and the banks are very cautious, so consequently the loan-to-valuation ratio comes down at that particular time. It might be two or three years later.

At the same time, if the circumstances are changing it is also possible that the values might be dropping. So it is conceivable that a valuation might be, for argument's sake, $2 million, and the loan-to-valuation ratio might be 70 per cent. Three years later there is a downturn in the market—the global financial crisis is a prime example; it happened in different parts of the world and even in this city here—and consequently the banks become very nervous about the state of the economy overall, so they see an enhanced risk. There is the possibility that people might default. They pull the loan-to-valuation ratio down. At the same time, it is highly likely that the value three years later, in a very depressed market, might not be $2 million. It might only be $1.5 million. That is often the difficulty for a valuer. In a buoyant market there is pressure for the valuer to be optimistic. Everyone is optimistic when it is a buoyant market. But when things are depressed the valuer is in a difficult position: the borrower wants him to look at it as an optimistic market, but we are independent, so consequently we are dealing with the realities of the marketplace. We are not real estate agents—we are dealing with actual sales.

CHAIR: I understand that. There has been some discussion about what should be the right of a borrower to get an additional valuation, rather than just have the bank select someone from a panel. The banks have put to us that quite often the valuations have to be quite specialised, whether it is the hotel sector, the construction sector or whatever. In the view of your institute, are there sufficient registered valuers around the country to ensure that, if a bank chose to get a valuation for the purposes of impairing a loan, a borrower, within a reasonable time frame—perhaps 14 or 30 days at the outside—would be able to find a suitably qualified valuer for any given sector to provide an alternative valuation?

Prof. Sheehan : In the major urban areas of Australia, yes. In the rural and regional areas there is a shortage of valuers. That tends to be a bit like the medical profession, where they tend to want to go to the major urban areas. So yes, there is a more than adequate number. I think there are about 8,500 members of the institute, not all of whom are certified practising valuers. I am probably guessing that there would be, maybe, over 4,000. It could even be about 5,000 CPVs throughout Australia. That is quite a lot of people to service 23 million.

CHAIR: In terms of the fees that are charged for the services, do you charge a fixed price or do you charge by the number of hours taken to do research and look at the value?

Prof. Sheehan : I cannot comment, because many years ago the institute used to have a code of fees, and trade practices said we could do that any longer. We have not had a code of fees for probably 20 years or more.

CHAIR: Can you give the committee an idea, then?

Prof. Sheehan : I have no idea. I cannot tell you.

CHAIR: You must have some idea, from your own practice, if not from anyone else's. If you were asked to value a pub—

Prof. Sheehan : I have no skill at valuing hotels, I am sorry.

CHAIR: Pick an area that you have some expertise in.

Prof. Sheehan : I do compensation assessments, for example, for compulsory acquisitions.

CHAIR: What we are trying to get a feel for is—and I am sure one of you is able to help us, at least in rough order of magnitude terms—in a valuation on a property development—a pub or whatever—are we talking in the order of thousands, tens of thousands or hundreds of thousands? Narrow that down for us. What is the order of magnitude for a valuation?

Mr Rayner : It is going to depend very much on the work that is involved and probably the number of hours that are seen to be involved. If you start off, say, at the bottom end, which is going to be residential, they are usually on a fixed fee—$220 to $250, plus GST, for a short-form report. That is pretty fixed for a mortgage situation. That would be a first mortgage situation and would be for one of the major banks. If you have a second or third mortgage, the fees are variable, again, according to the perceived amount of work that is involved with them as well as the perceived amount of risk involved with undertaking the valuations.

Once you get into the larger or more specialised valuations it is certainly going to be done on an hourly rate because of the uncertainty of the work that is involved. Each valuer will probably have to go back and do quite a significant amount of background research for something like a private hospital or a hotel or something like that. We would then be quoting to whoever the client is.

There is no fixed rule. If you have got litigation work, for example, it will be done on an hourly basis simply because you have no idea, as a valuer, what the brief is going to look like. We were involved with one job a few years ago where we were issued with a brief and by the time the final brief came out there were eight briefs and there was a huge amount of work to do.

In terms of absolute fees, fees for valuations will start off at a few hundred dollars. Probably your lowest level will be a first mortgage for the banks, which is that $220 to $250 range. After that it can be thousands, tens of thousands or even hundreds of thousands of dollars for some of the top end work.

Mr LAUNDY: Professor Sheehan, you answered the chair's first question about the independence of valuation given the fact that they are in fact instructed. The chair was asking about the potential for conflict. In your answer you said that valuers have an obligation, if the instructions in any way impede their ability to do the job in a manner that is fair and decent, to say no. Picking up on something that the chair also mentioned, banks are obviously large customers in the valuation market and users of the service and have appointed panels for different industry categories. In the fair dinkum department, if valuers were repeatedly declining business due to a potential conflict of instructions, how long would they stay on the panel would you think?

Prof. Sheehan : That is an interesting question because there is an issue not only in relation to the valuer repeatedly receiving, as you have given an example, instructions he does not like but also, as I said previously, professional indemnity insurance is incredibly expensive for valuers—not that I can speak for the large valuation houses operating here in Sydney that you would be aware of. Even though they may be on the panel for a particular bank or financial institution, they are also very aware of the fact that they could find themselves—

Mr LAUNDY: They are exposed—

Prof. Sheehan : in court on one particular valuation. They are very careful about that. They tread a fine line between, fairly obviously, being on a panel and maybe getting a flow of work. But they are also aware of the fact that they are dealing with not only a bank or financial institution as a provider of debt or equity but also, quite often, an informed borrower. That is an invidious position. In some respects they have got two masters. We have heard just recently that the New South Wales government is talking about scrapping the valuers registration. The reason is that there have been so few claims against valuers under the legislation, and the legislation began in 1975. The view, I gather, of the New South Wales government was that registration is really not causing any particular advantage or disadvantage. The institute runs a massive program of continuing professional development—a little like the law societies running their CLE programs.

Mr LAUNDY: This committee has had many submissions from customers of Bankwest relating to the time at which the Commonwealth Bank acquired Bankwest. Take hotels for example—something I know a little about. Given the fact that the hotel industry is actually quite small, in terms of the number of registered valuers in it, if there was an overlap on the board panel of the Commonwealth Bank and Bankwest at the time that these allegations were being made by former customers of Bankwest that valuation methodology was being applied in a way that worked against them, if the valuer who did that valuation for Bankwest was at the same time valuing for the Commonwealth Bank—if there was an overlap—and was valuing for loans written by the Commonwealth in the same environment at the same time, would you expect the valuation methodologies by that valuer for Bankwest and the Commonwealth to be conducted in the same way?

Prof. Sheehan : Not necessarily, because you would have to look closely at instructions the valuer was given by Bankwest and by the Commonwealth Bank, or whatever bank.

Mr LAUNDY: Why would the instructions differ at the same time?

Prof. Sheehan : I do not know. You used the example of hotels—I have been aware of compulsory acquisition matters where I have looked with amazement at how the lawyers have written different instructions on what you are and are not to take into account. So, it rests on the instructions that the valuer receives. As long as they are within the ethical framework within either the legislation and/or the institute's own practice notes, that is fine. But the valuer is able to resist any instructions that go against the guidance notes of the institute for professional practice.

Mr LAUNDY: In other words, if this panel were to call a valuer who worked for Bankwest and the Commonwealth Bank during the period that submissions have been made about and complained about, and differing methodologies had been adopted, the answer, in your opinion, from that valuer was that the instructions given by the Commonwealth and Bankwest would have differed?

Prof. Sheehan : I do not know. You are asking me a question I cannot answer because you would have to see the instructions that the valuer received from those both of the bodies and compare them. I cannot give you a better answer than that, unfortunately. It does rest with the instructions.

Senator WILLIAMS: Professor Sheehan and Mr Rayner, are you both valuers?

Prof. Sheehan : Yes.

Mr Rayner : Yes.

Senator WILLIAMS: If I was were a bank in 2008, and the global financial crisis came along and I was getting a bit concerned, would it have been normal for me to go to you and say, 'Look, I want you to revalue these properties just on the current market value after the GFC?'

Prof. Sheehan : As a bank?

Senator WILLIAMS: Yes.

Prof. Sheehan : As we said in the submission, it is fairly obvious that the banks are fully aware of the marketplace. They are in their actively providing debt or equity to people wanting to borrow against real estate. It is very obvious they have, should I say, a finger on the pulse of the market. Consequently, if they believe there is an oversupply of home units in a particular area of the market of Sydney or Melbourne or somewhere, it is not unreasonable for them to say, 'We need to have a closer look at that market and understand what is going on, because, are the prices weakening?' This is an ongoing thing that you would expect any bank or financial institution to do. A lot of them actually have members of the institute on staff, who are involved in gaining that overview of the market on a daily basis.

Senator WILLIAMS: If I were a bank and I sent you an order and said I wanted you to value these properties on the worst-case scenario, the worst-case scenario could be if we have a 1931 Great Depression. The worst-case scenario would be if the whole world economy collapses. How would you respond to that to do valuations on a worst-case scenario?

Prof. Sheehan : I would send them back, obviously. The question came from the chair earlier. If it is on the basis of normal market conditions and the property is placed for sale for the normal marketing period—the price has been received—or it is on the basis of a mortgagee sale in possession, that would be the basis of the instructions. To say that we want you to value on the basis of the market when it was in 1929—

Senator WILLIAMS: So if I sent you an email and I was boss of a bank—a commercial division—and I said to you, 'please do these valuations on the worst case scenario', you would send it back to me?

Prof. Sheehan : The instructions have to be clear about what that worst case scenario would be. If the worst case scenario were set out to be, for example, auction and settlement within 30 days, that would be an instruction. You would have to have clear instructions about exactly what that worst case scenario is.

Senator WILLIAMS: And if you did not have clear instructions you would send them back?

Prof. Sheehan : You would have to because you would not know what they were seeking. As I said before—

Senator WILLIAMS: So worst case scenario would be just a broad, vague request where you would say, 'There is not enough detail. The parameters are not set out there. I will not do those valuations.' That would be your response?

Prof. Sheehan : That is right.

Senator WILLIAMS: Would you expect your members to do the same?

Prof. Sheehan : They have to, because that is what is in our guidance notes and practice directions.

Mr RUDDOCK: I would like to ask a supplementary question. Some instructions may, in fact, knowingly produce lower valuation outcomes—a 30 day immediate sale, which we know will deliver a lower outcome.

Prof. Sheehan : If the valuer is asked to provide an evaluation on the basis of auction settlement within 30 days, that would be the instruction.

Mr RUDDOCK: That is the instruction, and the bank would know that that would produce a lower valuation outcome.

Prof. Sheehan : I cannot presume to know what the bank is wanting to do. They can either ask for a market valuation on the normal framework of a property offer for sale—

Mr RUDDOCK: What I have assumed from what you have said is that those instructions would inevitably produce a lower valuation.

Prof. Sheehan : No, I never said that.

Mr RUDDOCK: That is what I have assumed.

Prof. Sheehan : I do not think that you can assume that.

Mr RUDDOCK: You do not think I can assume that?

Prof. Sheehan : No, because it may well be—

Mr RUDDOCK: I would get a higher valuation under those instructions would I?

Prof. Sheehan : We are not in court, if you do not mind me saying Mr Ruddock. The point is that the valuer is asked to either pass comment in terms of a valuation of a property in normal market conditions, or on the basis of what we would call a 'for sale 30 day auction'. If the bank is intending to find out what that value is, I cannot presume to know what their intention is—it is not the knowledge of the valuer to be privy to that. Let me say, also, in a supplementary answer, that the status of the borrower is also an issue in the loans which are given.

Mr RUDDOCK: Absolutely.

Prof. Sheehan : It may well be that, as we have said in our submission as the institute, it is not only the security over the real estate—it is also the nature of the business and the income earning capacity of the borrower. It may well be a buoyant market, but it might happen to be someone who is selling timber wheels for which there is all of a sudden not a market any longer. So the bank becomes aware of the fact that the timber wheels market is not as strong as it used to be five or six years ago.

Mr RUDDOCK: I would suggest to you that such instructions would be more likely to produce an impaired loan on which the bank could act, and what you are really telling me is that instructions from a bank that require a valuer to give a valuation on that basis may well be a basis upon which default can then be established.

Prof. Sheehan : The bank would be informed as to the value of a property given either under a normal market exposure conditions—in terms of a sale price over a period of advertising that would be seen in the market to gain a normal market price—or they would be seeking a valuation on the basis, as I said, of a 30 day auction. What the bank does with that information is unknown to the valuer. They may choose to then balance that against other issues in relation to the borrower. We cannot really add much more to that because—

CHAIR: I understand completely that you cannot comment on the bank's motivations, but I think what Mr Ruddock is getting at is that earlier you made the comment to me that in a single line sale you would expect a discount on that—

Prof. Sheehan : In the sale of a large number of properties?

CHAIR: Yes, as opposed—

Prof. Sheehan : Absolutely.

CHAIR: So if you received an instruction for a 30 day tender, single line sale, as opposed to an open market, multiple unit sale, the expectation would be there that that would deliver a lower valuation than the open market.

Prof. Sheehan : Yes. It is an established principle. The sales in one line would give a discount. A prime example would be a developer who finds out that he has 30 blocks of land. He has sold most of them, but, for various reasons, he wants to move on to another market and he has five left over. He offers the whole five of them up as a sale in one line, and of course he would receive a discount because he would be prepared to provide a discount to someone who is going to be a borrower. That is just a normal operation of the market.

CHAIR: This is not your problem, but the issue for the committee is that we are continually being told by the banks that valuations are completely out of their hands because they engage independent registered valuers from a panel and they have no influence over the value.

Prof. Sheehan : True.

CHAIR: But, very clearly, depending on the instructions that are given, the broad direction of that value can change.

Senator WILLIAMS: Professor, I want to paint a scenario. I am in the credit recovery section of a big financial institution and I say to you, 'I want you to value down this asset we have security on.' You say to me, 'No, I've done a valuation. The market's going pretty well.' I say to you, 'I want you to lower it,' and you say, 'No, I'm not going to do that,' and you walk away. Then I get another valuer and that valuer does give me the lower valuation. Would it be concerning to your industry if that was the scenario?

Prof. Sheehan : I would say the second valuer would not be the member of our institute.

Senator WILLIAMS: Chair, I think we need to call a valuer along one day, perhaps even in camera.

Mr RUDDOCK: Sorry, there are valuers who could be giving valuations that are not part of your institute, to which your code of behaviour applies?

Prof. Sheehan : In Queensland, Western Australia and New South Wales, not all valuers are members of the Australian Property Institute. I would say about 80 per cent would be members of our institute. Also, in the rural areas, there are quite often people who have been stock and station agents, have particular knowledge of a reasonably small rural or regional area and are not members of the institute but have an awful lot of experience. It is not particularly common.

Mr Rayner : I might point out that, if we are talking about banks in particular, banks will normally require that their panel valuers be members of the Australian Property Institute at an associate level or above. In that case, the code of conduct would apply to bank valuers—if you are talking about bank valuers. The main valuers who are not members of the API are often in government instrumentalities.

Mr RUDDOCK: We could put a question on notice in relation to all of the valuations that were carried out and whether the valuers were qualified in the way you have suggested.

Mrs SUDMALIS: That answers one of my questions, thank you, as to whether the panel member valuers were registered valuers. I would have thought—this is slightly separate—that, if there is a move afoot to take away that registration of valuers, that would be a fairly worrisome thing for not only your industry but the valuation industry as a whole because it would mean that they may not follow the same ethics that you are endeavouring to establish.

Prof. Sheehan : I could answer that by saying that since 1975—I can only speak of New South Wales—valuers' registration has not elicited significant complaints. In fact, there have only been a miniscule number of complaints against valuers under the legislation. So, consequently, the New South Wales government has moved towards removing valuers' registration. But let me say that, at the same time, it will increasingly enforce the importance of being a member of the API and, particular, being a CPV. As Mr Rayner said a moment ago, to be on the panel for a bank or financial institution you have to be a member of the API—and of course you have to be a CPV. We have some members of the institute who are not valuers who do other work.

Mrs SUDMALIS: That brings me to the fact that you just mentioned that a secondary valuation, where a first one had been refused, would most likely have been done by somebody who was not part of the professional body.

Prof. Sheehan : That is right.

Mrs SUDMALIS: That is part of the problem here that I suggest might need to go under consideration. The other one is—

Prof. Sheehan : Sorry to interrupt, but what Senator Williams said was that the second valuation would be done by someone who would do what the bank wanted him to do, presuming whatever it was it wanted him to do, where the first valuer—presumably a member of the institute because he was employed or engaged by the bank—had refused to do the valuation. It was a hypothetical example.

Mrs SUDMALIS: No, it was actually a real one, but go on.

Prof. Sheehan : This second valuer, I would assume, would have to be on the panel for the bank.

Mrs SUDMALIS: Yes. We are making a lot of assumptions here, but let me go on.

Prof. Sheehan : We are.

Mrs SUDMALIS: Should a valuer be given a set of instructions from the bank which, for me, actually takes away any sense of independence? I find it very difficult to understand that you are coming in under the guise of independent valuation and yet there is a set of instructions that you have to follow depending on what you are given by the bank.

Prof. Sheehan : No, sorry. We do not have to follow them. The bank can provide instructions, and what happens is that the valuer then considers the instructions and decides whether he is going to accept the instructions and whether they fit into the framework of the institute's ethics and guidance notes, and if they do not he sends the valuation back. It is extremely clear in the professional practice of the institute that, if it does not comply with the institute guidelines, the valuer is required to send the instructions back and will explain why.

Mrs SUDMALIS: Suppose you have an ethical valuer who says, 'This is rubbish; I am not going to do this valuation based on these instructions,' and refuses the job. The bank may give that to another one. Where is there a closure of the loop of responsibility and reporting here? That next valuer may do precisely that. Where is the ethical valuer able to report on that circumstance to say: 'You know what? If this valuation is done according to these tenets, it is actually not following ethical standards'?

Prof. Sheehan : That is a difficult question, because the first valuer would not necessarily be aware—I would even say they probably would not be aware—of another valuer being approached. If he just sent the valuation back and said, 'I'm not doing this, thank you very much,' that would be the end of it. He no longer has any involvement with that potential instructing party.

Mrs SUDMALIS: So there is no responsibility here?

Prof. Sheehan : If I go to one doctor and I do not like the doctor's diagnosis and I go and see another doctor, does the first doctor ring the second doctor up and say, 'Look, Sheehan's going to come and have a talk to you'? It ends if I say, 'Look, I'm not going to deal with the first doctor; I'm going to another doctor.'

Mrs SUDMALIS: I am actually thinking of the panel valuers, who presumably would know the other panel members. Somehow or other we have to honour the fact that you guys are trying to act with the greatest integrity, but it does not look to me like there is any sort of way that a person who is doing the right thing can actually say: 'You know what? This, this and this requirement that you have put here are not according to the rules of an ethical valuer.' Where does that go to from there?

Prof. Sheehan : I think you are having difficulty with the ethics of the institute. If you are a member of the institute and you are a CPV member doing valuations, that is where it starts and ends. The banks are aware that, as Ken said a moment ago, to be on the panel you have to be a member of the API and you have to be CPV. The banks are aware of that. I am not here as an apologist or a supporter for the banks, but what I am saying is that that is simple fact. Hypothetical positions you are placing before me are frankly untenable, because the banks know what the institute's rules are and they know that, if they present instructions to a member of the institute which do not fit in with our ethics and guidance notes, they will simply be sent back.

Mrs SUDMALIS: Thank you very much for putting that on record.

CHAIR: Can I just indicate, though, that in other areas, for example, a public servant in the defence department who is involved in materiel procurement has an obligation to report if somebody comes and tries to offer them gifts or inducements to make a particular decision. They have an obligation to report that up to the appropriate authorities. You could argue that they know they cannot accept them, so when they have said, 'No, I can't accept them,' their obligation stops, and that is essentially what you have just argued about the institute.

Prof. Sheehan : That is right.

CHAIR: But what the Commonwealth has done is say, 'No, you should report it to an appropriate authority so that they can take it up with the party and say, "That's unethical conduct and in all likelihood there would be a cessation of any further involvement in tender activity."' I think what Mrs Sudmalis is getting at, which I tried to raise earlier, is: where is the obligation on your valuer? Sure, their individual dealing with the bank stops when they say no, but where is the obligation for them to come to you as a professional society and say: 'Hey, I was just approached to do something that breaches our code. The high probability is someone else somewhere will be approached by the bank on the same terms. The association should be aware, and this shouldn't be allowed just to sink into the woodwork for someone else to pick it up'? Where is that loop closed? Do you have an obligation on your members to report when they are asked to do something that breaches your code?

Prof. Sheehan : We are not a statutory body in terms of policing. Having said that, at the same time, the institute is continually updating its technical notes, and it is continually updating whatever guidance it sends out. We have member alerts, for example, which are sent out. A prime example is that when native title came into existence in 1992 with the Mabo decision, there was a member warning sent out throughout the whole of Australia—I know because I wrote—advising rural valuers that when they are undertaking valuations of land which would be less than freehold, in other words pastoral leases and things like that, to be aware of the fact that there could be the presence of native title. After the Wik decision, in 1998 I think it was, there was the issue of coexistence with pastoral leases. So there was a further member alert sent out; in fact, it ended up being part of a guidance note—it is an ongoing process. Just in the New South Wales division of the institute there are over 70 continuing professional seminars conducted within our own premises and externally every year. The program is intensive. We have something called the risk management modules, which are compulsory for all of our CPV members to undertake each year.

CHAIR: I accept the fact that you have a very good CPV program, and I accept the fact that you send out information notes to people. But what I am hearing from you is that you have no process under your code that obliges members to report either to you or, potentially, to ASIC if they are asked to do something that is in breach of the normal ethical conduct for your code.

Prof. Sheehan : The difficulty lies in having documentary evidence.

Mr LAUNDY: But the instructions would be in writing.

Prof. Sheehan : The instructions may well simply be provided in a draft form and sent back. If they are sent back and not acted upon, the valuer says, 'I cannot take those instructions', and he just sends them back. They are in a draft form until they are accepted.

CHAIR: Are there any further questions?

Mr RUDDOCK: What is your relationship between your institute and the Australian Valuers Institute?

Prof. Sheehan : There is no relationship at all. I know nothing about them.

Senator WILLIAMS: Have you ever heard of them?

Prof. Sheehan : I have. I think they are a small group of valuers. I do not know anything about them. It is a nice name though.

Ms OWENS: I accept that there is no requirement at the moment that you report. You may not be able to answer this, but is there something that could take place where you would at least be recommending that your members report it if they were threatened or if there were officer bribes—

Prof. Sheehan : Yes, absolutely.

Ms OWENS: So there is an area where you would say, 'Okay, that is going too far'?

Prof. Sheehan : Absolutely.

Ms OWENS: Can you give me an example of a couple of things where you might go, 'Oh not sure about that; therefore, I will not do it'? Can you give me some examples of what a bank might ask that would start to ring the warning bells but you would not—

Prof. Sheehan : There is a presumption here in your question. I am not being critical of the question but—

Ms OWENS: No, I understand.

Prof. Sheehan : there is an underlying flavour here in some of these questions that the banks are somehow or other trying to influence the valuers. What I am trying to say is that the institute has some pretty tough guidelines, and if you get thrown out of the institute you are unemployable as a valuer. Okay? So that is the starting point. That is a very crucial starting point because firstly you are not going to have professional indemnity insurance lying behind you to cover you with the run-off period for all the other valuations you have done over the years. It is an extremely dangerous position to find yourself in legally. That is why I keep on coming back to the fact that the members of this institute—and not members of the other crowd, whoever they are—are extremely cautious. A bank's policies, or whatever else it might do, in terms of lending is frankly the banks business in terms of whether it lends or not. But it is part and parcel of the resource that I assume the bank will use to make its decision about whether it will provide debt or equity funding to a particular borrower. The valuation is just one part of it. I suppose what I am trying to get at here and what we are also saying in our submission is just that. It is part of the resource that the banks use to inform themselves of whether or not to provide debt for equity funding. I would not like the committee to think that the valuations are absolutely the linchpin of whether or not they decide to lend or not. But, also, the market itself is extremely fluid. Twelve months ago you saw people rushing around to buy apartments off the plan. At the moment, I am aware—and we all are—that there are so many apartments being built in and around Sydney that it is fairly obvious that there may well be a change in the marketplace in the near future.

Ms OWENS: You are right: there is a flavour in a lot of the questions that are being asked.

Prof. Sheehan : I am not being critical, let me say.

Ms OWENS: I kind of vaguely am, which relates back to the Bankwest scenario and the ANZ. There are two particular circumstances where there are very real questions being asked. You said a couple of times that if a valuer is not happy with the instructions, or they think they do not meet the guidelines, they send them back. Could you give me an indication of whether that would happen a lot or very rarely or whether there is sometimes one institution. Can you just give me an indication about whether we are asking about a minor part of the industry—

Prof. Sheehan : I cannot, because within the privity of the arrangements between the valuers who received instructions it is, effectively, a potential contractual arrangement between the bank and the valuer. That ends, and then that is the end of that potential arrangement. I do not know.

Ms OWENS: That is a very real answer, but part of what we are trying to get to is that, at the moment, no-one really knows whether there is a widespread behaviour, as seems to be reflected in some of the Bankwest circumstances, or not. Again, that is no criticism of you, because that is your—

Prof. Sheehan : No, I understand what you are saying. But I think one indication that could respond to that is the fact that, quite independently of the institute and independent of the banks and financial institutions, the New South Wales government, after a great deal of examination, has taken the view that registration of valuers ought not to continue. And, simply, the reason is that there has been so little disputation since 1975 over the activities of valuers, and the institute itself—and I say that, obviously representing the institute here—is pleased to see that, to the extent that it is evidence of our pretty harsh program of focusing upon the institute's admission procedures, CPD program—and I know I said that before—and the risk management modules which were introduced some years ago. It is a pretty harsh environment, and the reason why that is there is that it was driven by the need to give support to the professional indemnity insurers, because they were obviously aware of the fact that valuers are, to a certain extent, in a pivotal role when it comes to looking at property as a potential security.

Ms OWENS: There is an old economic theory that was around before the global financial crisis that stability breeds carelessness. If those registrations were stopped because they had been working well, would you see consequences down the—

Prof. Sheehan : No. In fact, you have led me into the area where I can say that we are pleased to see registration being gotten rid of, if only for the reason that it has shown to us that our program of really harsh treatment of potential members and ongoing membership of the institute has been so successful. We take some pleasure in seeing the fact that the registration is ceasing because of all the hard work we have done. I cannot say much more than that to you.

CHAIR: Professor Sheehan and Mr Rayner, thank you for your submission and thank you for your evidence here today. Could you have anything you have undertaken to take on notice back to the committee by 27 November. Thank you.

Prof. Sheehan : It is our pleasure.

CHAIR: We now call members of the Australian Restructuring Insolvency and Turnaround Association.