Melville leads the industry campaign:
- The Alternative Investment Fund Managers Regulations 2013, Regulation 24(5) must be reformed.
- As a result of the unlimited indemnity for external valuers (arising from Regulation 24(5)), external valuers are understandably reluctant, for risk management purposes and often at the request of their insurers, to take on the external valuer role under 2013 Regulations.
- AIF investors are therefore having to rely on the Alternative Investment Fund Manager’s internal valuation, and do not benefit from independent determination of asset value by an external valuer. This runs counter to long-established principles of investor protection and good corporate governance.
The current Regulation 24(5) wording ironically achieves the opposite of the policy intent of The Alternative Investment Fund Managers Regulations 2013 to protect investors.
Melville has co-ordinated with industry stakeholders and progressed a constructive engagement with officials at the Financial Conduct Authority and HM Treasury, and forwarded to the officials this submission dated 18th December 2023:
The Problem
Regulation 24(5) overrides any contractual limit on liability agreed between the Alternative Investment Fund Manager (AIFM) and the valuer. This simply does not work in practice.
At present few, if any, professional valuers can or will accept appointment as external valuers by an AIFM because of the unlimited liability imposed by Regulation 24(5).
Most reputable valuers in the UK are members of professional bodies that require them to have professional indemnity insurance. Moreover, some insurers will also have policy conditions that require all instructions to contain liability caps.
Fix the Problem
Melville, and other stakeholders, propose an amendment to Regulation 24(5) along the lines of (with in bold font amended wording):
(5) (a) Where the AIFM of an AIF and the external valuer agree to limit liability of the external valuer for losses suffered by the AIFM as a result of the external valuer’s negligence in performing its tasks (provided the limit of liability agreed is reasonable and proportionate to value of the AIF assets), the external valuer shall only be liable to that limit; and
(b) Subject to Regulation 24(5)(a) and irrespective of any other contractual arrangements, an external valuer is liable to the AIFM of an AIF in respect of which the external valuer is appointed for any losses suffered by the AIFM as a result of the external valuer's negligence or intentional failure to perform its tasks.
He understands - as at February 2025 - that officials at the Financial Conduct Authority and HM Treasury are considering the reform of uncapped liability provision for external valuers (in Regulation 24(5)) as well as other Regulations in The Alternative Investment Fund Managers Regulations 2013.
Melville urges the officials to consult soon on the reform of these Regulations.
Articles:
19/01/24 IPE Real Assets: Guest View: Solving real estate’s fund valuer problem
18/12/23 RICS: Protecting the position of valuers under AIFMD
28/05/21 IPE Real Assets: Analysis: Why the UK’s external valuer liability problem for real estate must be solved
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