Regulatory Impact Assessment of RICS’ Regulatory Reform Proposals We have produced this Regulatory Impact Assessment (RIA) to enable members to compare the fine detail and cost implications of the current regulatory regime with those of the proposed new framework. This should help members to assess the likely impact of the new regime on them as individuals and also on their firms.
Content 1 2 3 4 5 6 7 8 9 The Scope of the RIA Objectives of the reform proposals Consultation and communication Summary of main impact areas and outcome Detailed impact assessment Further analysis – impact of the proposals on small firms Proposals for monitoring impact of new policy The no change option Risks of moving to new regime
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The scope of the RIA
This Regulatory Impact Assessment follows the principles of the Cabinet Office Better Regulation Executive‟s guidance to government departments on delivering successful policy changes. It is an analysis of the likely impacts of a policy change and the range of options for implementing it. 2 Objectives of reform proposals
The profession is seeking a new regulatory approach that is simple, risk and outcome based, cost effective and protects both members and the public. To simplify the implementation of regulatory compliance requirements on firms and, where possible, on individual members without any reduction in regulatory effectiveness. To achieve this wherever possible with no increase in the real costs of regulation by RICS. To enhance the status of members and develop a regulatory brand that is widely recognised and respected. To increase/maintain protection for the public. Demonstrate clearly to Government that RICS has a robust self-regulation scheme in place (which should reduce the need for Government intervention). 3 Consultation and communication
The regulatory reform proposals were subject to an extensive consultation exercise. They originated through the development of Sir Bryan Carsberg‟s top level recommendations to change RICS‟ regulatory approach. The Carsberg report itself was the result of extensive consultation both within and outside RICS. The current proposals too have been subject to extensive member and non-member consultation and, before implementation are subject to a vote by all those they will affect. This vote by over 80,000 members will be preceded by an extensive communications exercise. In order to inform this assessment we commissioned independent market research to ascertain the current cost of compliance with RICS‟ rules particularly on clients‟ money – the most costly compliance area. 4 Summary of main impact areas and outcome
Individual members will be offered a reduced set of Rules of Conduct that are principlesbased and less prescriptive. In the main, individual members will not be affected by the proposed reforms. Members who are principals in private practice will benefit the most. At present they are held personally responsible for all activities that are regulated by RICS, even when they have no day-to-day responsibilities for ensuring compliance. The
proposals will enable RICS to regulate firms, rather than individual partners/directors of firms, for obligations that are dealt with at firm level. Firms that hold clients‟ money will also benefit from the proposed reforms. The structure of the new rules will mean fewer prescriptive rules to follow as well as the cessation of the requirement to submit annual accountants‟ reports. A less bureaucratic approach to disciplinary procedures will be implemented. The changes to the regulations will allow for a more flexible approach to be taken by staff and disciplinary committees to relatively minor breaches of the rules. 5 Detailed impact assessment On members RICS current Rules of Conduct are long and detailed, extremely complex, poorly understood and out of step with best practice regulation in the 21st Century. They are enforced through an approach that requires members to maintain detailed compliance records, and RICS staff to ensure that members have followed all the details. Finally, at the end of the process, sits a disciplinary regime that punishes rather than assists compliance; uses formal hearings to deal with relatively minor matters; and employs a severe penalty regime for both compliance and conduct matters. RICS‟ current regulatory regime has an impact on two groups. The first group comprises all 110,000 members. The other group comprises all firms that are captured within the compliance arrangements but it captures them through the subset of all the individual members that work in those firms where it holds directors, principals etc specifically responsible as individuals for key compliance functions. The assessment will not address the impact of the proposed reforms on 110,000 individual members except in a very general way. RICS takes, as a given, that professionals must maintain their professional competence and that, therefore, this regulatory element is not a matter for debate. No change in scope. Only implementation method will change. Rules for individual professional conduct matters will be clearer and will cover all members worldwide. Full regulation costs comes from members‟ subscription central funds. There is no proposal that individual members should finance the regulatory reform proposals through an increase in RICS subscriptions.
Current regime
Proposed regime Costs of current regime Costs and benefits of proposed regime
Current regime
On firms The majority of current compliance requirements affect member principals/directors of firms who are held responsible for their corporate compliance activities. The money costs of the regime include: An element of individual membership subscription to RICS for regulatory services. Additional real expenditure in-firm to meet the requirements of RICS rules – mostly to external consultants such as accountants. Internal process and system to meet RICS rules.
Proposed regime
In addition, there are particular and significant costs to those who fall foul of the current regime in terms of both money and reputation. It is generally accepted that RICS‟ current rules require an enforcement regime that is disproportionate, poorly targeted and costly to many individual members who have no real control over their firm. The new rules propose a new regulated entity – a regulated firm. This firm will be responsible for those regulatory processes that are the responsibility of the firm. Such an approach will end the untargeted approach where all directors (including those with the word „director‟ in their title but who are not statutory directors) are held responsible for all of their firm‟s regulated activity. In addition, the introduction of the entity firm will be mirrored within RICS by the implementation of a new database that will be better suited to sweep up firms‟ regulation within a single return. Our aim is to reduce the amount of communication that members must have with RICS. Those firms that have central training and development will be able to work with RICS to link that to professional CPD monitoring, reducing the bureaucratic burden on firms‟ employees. There are a number of costs that fall on firms and these are dependent on the functions carried out by those firms. RICS has around 10,000 firms engaged in providing surveying services to the public – and it is these firms that will fall within the scope of the proposed new regulation of firms‟ regime. This is not an homogeneous group and, within the 10,000, around 3,000 engage in the specific activity of holding or handling clients‟ money in some form or another. Currently all firms must have and provide evidence of:
Costs of current regime
PII insurance and complaints handling procedures.
Costs and benefits of proposed regime
These matters are central to any professional practice‟s offer to the market. There is no proposal to change these requirements in detail. If members vote in favour of the proposals to regulate firms there is no proposal at present to raise a charge on those firms that do not hold clients‟ money. In addition, the changes in regulatory approach and process improvements should assist firms in reducing the real cost of compliance with RICS regulation. There is, however, on the table, a proposal that has been approved by Governing Council, to extend the Surveyor Ombudsman Scheme from its pilot in Scotland to the rest of the UK. We are looking into this at present but external political and potential legislative developments will shape the outcome of this. On firms holding clients’ money Under the present regime firms have to follow strict, detailed rules to ensure they comply with the members‟ accounts rules. These include annual self certification as to whether or not a firm holds clients‟ money and the requirement to submit an annual report prepared by an external accountant to certify that the firm‟s accounts are kept in accordance with RICS rules, where clients money is held. The new Members‟ accounts Rules proposals will have an impact on all those firms holding clients‟ money. The detailed rules will go, as will the requirement for an external accountant to check members‟ client accounts and to verify they have been managed as required by RICS rules. The new approach will require firms to look after client money and keep it safe and separate but will not prescribe the form this must take. To meet the twin aims of better and cost effective regulation we have developed an enforcement regime that acknowledges that members are best placed to operate their accounts in the way that suits them, subject to the proviso that they define and keep safe and separate any client money. We have proposed that the regulatory enforcement of such a policy will cease to involve third party reports that are subsequently checked, verified or/and investigated by RICS. Instead it will involve direct investigation and input by RICS itself. It is possible that moving from an annual certification by an external accountant to an inspection regime at least once every third year by RICS may lead to lower public protection and increased risk. The Transitional Regulatory Board (TRB) has considered this issue and has concluded that the benefits of a regime operated by RICS,
Current regime
Proposed regime
Costs of current regime
together with targeting in high risk cases which may lead to an increased frequency of visits, offset this risk sufficiently although the approach will be kept under review during year one. The figures suggest that RICS could inspect every year and still deliver the reports more cheaply than by members using external accountants. In addition to the above, firms holding clients‟ money must provide an annual certificate provided by a qualified accountant that they have complied with RICS‟ accounts rules. We employed an independent market research company to research with member firms holding client money the cost of doing business “the RICS” way. They consulted a large sample of firms and have given us assurances concerning its statistical significance. We therefore can be confident that (+ or -5%) that the current regime: Costs firms holding clients‟ money £3.9million for accountants‟ reports and costs firms holding clients‟ money £11.5million in additional internal costs. Broken down differently the average costs of an accountant‟s report is £1,500 and internal systems £4,700.
Costs and benefits of proposed regime
The average firm therefore pays around £6,200 a year to comply with RICS‟ client money requirements. We believe that the reason this figure is so high is a combination of very detailed compliance regulation and the requirement for external certification. The creation of a joint monitoring unit will cost £1.2million – a saving for firms of around £2.5 to £3 million. The unit will be staffed by professionals who will be able to assist members are well as report on their accounts. In addition, the approach removes the needs for member firms to duplicate accounting processes and systems with a resulting saving of over £11million. (These actual and hidden costs of compliance were identified from the market research exercise mentioned in paragraph two above and below). If members vote in favour of the proposals these firms will face additional levied charges but the majority should gain reduced real and hidden costs as well as benefit from shorter rules, the new approach to compliance and less risk of disciplinary action for relatively minor breaches. The likely fee scale in terms of firm size compared with the market research evidence on current external fees for compliance with accounts‟ rules are set out in the table below.
No of partners/directors 1 2-4 5-9 10-24 25-49 50+
Current fee to external accountant £1200 £1780 £3360 * * £40000*
Fee range to RICS under new model £250 £500 – 700 £1000 – 1500 £2500 – 4000 £5500 – 7000 £11000 – 15000
* range for firms with 6 principals or more is £0 – 16000. The mean is £3360 and anecdotal evidence suggests that some firms pay up to £40000.
Current regime
Proposed regime
Costs of current regime Costs of proposed regime
On conduct and discipline The current approach to conduct and discipline involves two levels of formal panels and little flexibility for member firms to improve or come back into compliance without formal costly procedure, serious penalty and reputational damage. The reform recommendations propose a move away from a strict liability approach to compliance which often ends in expensive and damaging disciplinary hearings. The new proposals are based on the desire to bring members back into compliance, agreeing a suitable approach to penalty where there is non-compliance and only using disciplinary processes to deal with serious matters. This should reduce costs to RICS and members without any reduction in professional standards and reputation. Full regulation costs comes from members‟ subscription central funds. Costs incurred by RICS and those members appearing before a panel will be significantly reduced with the introduction of one disciplinary panel. The move to a more flexible approach to discipline will reduce administrative costs.
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Further analysis – impact of the proposals on small firms
Given the composition of RICS‟ regulated firms we have looked carefully at the impact of these proposals on small firms. It is clear that those small firms who currently pay nothing for professional services to certify their accounts which will see an increase in their cost. That said, the market research we commissioned showed that such firms are not common. The average annual cost of an accountant‟s report to small firms being £1200. We are also aware that some members‟ accountants wrap the RICS report into the annual charge and that there will be no reduction in fee. Again, the evidence suggests that this is not common and that professional fees can and should be broken down in detail.
Internal costs of complying with RICS rules also vary but greatly simplified rules should enable firms to demonstrate compliance through existing processes and systems. 7 Proposals for monitoring impact of new policy
New governance arrangements and IT systems will ensure that the new approaches to both compliance and disciplinary matters will be subject to review, audit and analysis by independent Boards comprising members of the profession and lay members. There is sufficient flexibility in the approach to allow fine-tuning over a period of time. In particular, there will be careful scrutiny of the new approach to deal with compliance breaches to ensure fairness and consistency. 8 The no change option
RICS has embarked on regulatory change and modernisation because of member pressure. The current regime no longer serves its purpose in a modern business environment and has become a practical millstone. The long and detailed approach to rules and regulations is the status quo and it is widely accepted that this is no longer an option. The detail of how the new principles-based approach would bite is, therefore the issue. The proposals should not have an adverse impact on firms that do not hold clients money. Other than the simplification of the Rules of Conduct, compliance requirements remain broadly unchanged except that there will be a reduction in the numbers of directors held responsible for general firm compliance work on matters such as professional indemnity insurance and complaints handling procedures. The new regime will target directors, nominated for particular compliance activities by their firms, in the event of a problem with those activities. In addition, firms may see a small cost reduction as RICS improves its IT and coordination of compliance. No change for those firms holding clients‟ money would mean a continuation of the detailed rule based approach and its knock on costs in terms of external charges and internal bureaucracy. 9 Risks of moving to new regime
A complete switch to a principles-based approach with a relaxation of detailed monitoring rules presents different problems. Such an approach would reduce costs for most member firms but could also involve: the removal of perceived client security a perceived increase in risk to client money a consequent reduction in RICS‟ commitment to public protection a policy that runs counter to public and government expectations of selfregulation
a potential risk of government intervention
The TRB has considered all of these risk factors and will continue to keep them under review.
RICS Professional Regulation and Consumer Protection August 2006