Alison Hardy and Paul Joyce uncover the benefits of the Investment Property Forum’s new directive on conflicts of interest
The IPF protocol at a glance
- It is a voluntary code of practice governing agents’ conflicts of interest
- Agents can generally act for multiple investors with consent, but not vendor and buyer
- Agents must have clear conflict policies in place
- The nature of any instruction must be clarified at the outset
- There is clear emphasis on transparency and confidentiality
- Although without regulatory force, it will be recognised as a badge of ethics and good practice
Conflicts of interest are an inevitable fact of life for professionals dealing with property transactions. It is often the case that multiple parties are involved with a potential transaction and many of these parties may have long-standing relationships with the same agent.
The management of such situations can be a professional and ethical minefield, with the desire to honour existing relationships conflicting with the duty not to prefer one client’s interest over the other. In such situations it is often far from clear how best to proceed.
The Solicitors Regulation Authority’s Code of Conduct (the “SRA Code”) includes extensive provisions for dealing with potential conflicts of interest, and failure to adhere to these provisions can lead to the SRA taking enforcement action. There is clear information available as to when solicitors and surveyors can act for parties with competing interests and how such situations should be managed. Solicitors have clear rules regarding conflicts within the SRA Code.
The RICS Real Estate Agency and Brokerage Guidance contains both a mandatory practice statement and a guidance note on surveyors’ duties to their clients and how to ensure that they remain as objective and transparent as possible. Again, breach of the practice statement can result in professional sanction.
The IPF Protocol
Investment agents who are not qualified with the RICS or SRA have remained free from regulation and with little guidance, leaving the industry lacking transparency and open to sharp practice.
This has finally started to change with the launch by the Investment Property Forum of its Protocol: Open Market Investment Agency (the “IPF Protocol”). This does not have the same force as either the SRA Code or the RICS’ practice statement and remains entirely voluntary. That does not mean, however, that it will be irrelevant or ineffective.
The IPF Protocol, launched on 26 November 2014, states that its aim is to “establish clear guidance around good practice relating to open-market property investment sales and acquisitions, in order to address potential conflicts of interest”. The IPF makes it clear that the guidance is high-level and aims to provide overarching guidance rather than delve into forensic detail.
The IPF Protocol identifies two specific examples of potential conflict: multiple introductions and dual agency.
Multiple introductions
“Multiple introductions” refers to the situation where an agent acts on behalf of multiple bidders or investors. There is a clear potential for conflict in such situations; it is practically impossible for an agent to act simultaneously in the best interests of all investors.
The IPF Protocol suggests that when an investor instructs an agent, the parties should seek to clarify the nature of their relationship at the outset. It recommends that investors should have an “introductions policy” to provide to introducing agents that clarifies the general basis of the instruction and what is expected of the agent.
Agents should also have a clear “barrier policy” that is available to investors on request. This policy will detail how potential conflicts are managed and reviewed, and should be proactively managed and regularly reviewed with compliance enforced across the organisation.
In addition to the content of the introductions policy, the IPF Protocol states that the investor and agent should, as soon as practically possible, confirm in writing their terms of engagement to ensure that both parties are clear as to the nature of the relationship.
These agreed terms should make it clear whether the agent is appointed on an exclusive basis, or instructed on a non-exclusive basis, at which point the agent’s barrier policy will come into effect to maintain confidentiality.
The IPF Protocol states that an agent without a clear and robust barrier policy should not act for multiple investors on the same transaction.
Once formal appointment terms have been agreed, the purchaser’s agent should confirm the basis of its appointment to the vendor’s agent and, in the case of an exclusive appointment, end any discussions with other potential investors.
This is a welcome development. The IPF Protocol does not prohibit agents from representing multiple investors, but ensures that barriers are put in place so as to maintain confidentiality. Furthermore, the vendor must be made aware of the basis on which a purchaser’s agent is instructed. This proactive transparency ensures that all parties are aware of the nature of all relevant instructions at the outset and there can be no misunderstanding further down the line.
Dual agency
“Dual agency” refers to an agent acting both for the vendor and a potential purchaser on a transaction. The conflict issues are even clearer here than with multiple introductions. The IPF Protocol recommends that the default position is that an agent instructed by a vendor should not act for a potential purchaser.
As with multiple introductions, the IPF Protocol states that where an agent is instructed by a vendor there should be clear written terms of engagement. If there are any relevant buying mandates in place the agent should clarify these at the outset. Any approaches to potential purchasers should be made solely in the agent’s capacity as the retained selling agent and it should not try to act for potential purchasers.
The IPF Protocol only envisions vendor agents acting for purchasers in circumstances where the agent has a pre-existing sole buying mandate. In such circumstances the terms of engagement need to be reconfirmed with both parties and the agent’s barrier policy must be activated. This will ensure that the teams acting on buy-side and sell-side remain separate and duties of confidentiality are upheld. All other prospective purchasers and their agents should be notified.
Where an agent is acting for both the vendor and potential purchaser all bids should go to a third party, whether that be the vendor itself, the vendor’s solicitors or a joint selling agent.
While much of the above may seem common sense and good practice, this does not mean it has always been adhered to. It is not uncommon for agents to represent both sides and without a clear policy on how to act when the situation becomes murky.
This is a particular risk for large firms of agents with multiple offices. Surveyor’s firms and lawyers have for many years invested in sophisticated conflict-checking software and it seems that many large firms of agents will need to adopt a similar approach if they are to adhere to the protocol.
Advantages and benefits
The IPF Protocol is a move towards bringing agents’ responsibilities and duties in line with those of other professional bodies. While there has understandably been some scepticism directed towards the protocol due to the fact it is entirely voluntary and there are no consequences for non-compliance, in practice it will certainly have relevance.
Agents who act in accordance with the IPF Protocol (and publicise the fact) can point to it as proof of good practice, honesty and transparency. Compliance demonstrates that the firm is attentive to potential conflict issues and has adopted a methodical internal policy to attend to the interests of clients. Firms will be able to use their compliance with the protocol as a badge of ethical standards and in time vendors and purchasers will come to prefer agents who are protocol-compliant.
The fact that the IPF Protocol is voluntary rather than mandatory does carry some advantages. In some circumstances an agent acting for both a purchaser and a vendor might produce a more favourable outcome for both parties – and it will be in their interests not to adhere to the protocol. Being voluntary allows parties to opt out without fear of professional sanction. Provided that the terms of engagement and the relationship is dealt with in accordance with the overarching principles of transparency and honesty then such an arrangement can still fit within the spirit of the protocol.
The IPF Protocol should be welcomed by both vendors and purchasers as a long overdue clarification of agents’ duties and responsibilities. Agents should also welcome the clarification; although adherence with the protocol may involve additional administration at the outset, it finally provides clear guidance on how best to deal with conflicts.
Several high-profile firms have already signed up to the IPF Protocol, and the industry has now started on the road to self-regulation. It remains to be seen whether any further regulation or guidance will follow; for now, agents would be wise to seek advice on how to install protocol-compliant procedures and to have the relevant engagement letters and policies drafted as soon as possible. True to the adage “buyer beware”, vendors and purchasers would be wise to instruct only those agents who comply.
Alison Hardy is a partner and Paul Joyce is an associate at Squire Patton Boggs LLP
