Things To Worry About From the British Columbia IAG Report

The other day, I let you all know about the bomb that British Columbia in Canada dropped on the real estate industry. I’ve spent some time reading the full report, and while this is still sort of an early first-reaction, I think there are a few things to worry about from that report, certainly for Canadian real estate, but also for American organized real estate. The reason is that these things also apply with full force to the U.S.

The reason why I’m concerned, and why you should also be concerned, is that we’re talking about Canada here. We’re not talking about Zimbabwe or Peru, countries with wholly different traditions and legal regimes, such that we can’t even compare the two industries. Canadian real estate works in much the same way that American real estate does, and Canada is in the Anglosphere, with similar laws and mores and traditions.

If lawyers, government officials, policymakers and intellectuals in Canada found various problems with the way that real estate works up there, there’s a pretty good chance that American lawyers, officials, policymakers, and intellectuals would find similar problems with the way things work down here, and likely recommend similar reforms.

So, without further ado, let’s get into it.

Overall Observations

First, page 58 of the IAG Report has the full list of recommendations. We’re going to touch on many of them, and weave them throughout our analysis, so feel free to go read them all. For that matter, read the whole Report.

Second, the overall thrust of the Report is essentially that the real estate industry — the Real Estate Council and the various Boards — has failed to properly regulate, monitor, and discipline real estate agents. The recommendation, therefore, is for the Government to do what the industry failed to do.

Third, many of those “failures” are rooted in practices of the North American real estate industry that are fundamental to how things work. If the underlying problems are the same, then one can expect the attempt to fix those problems to be the same.

With that said, here we go.

1. Guarantor of Honesty

The first thing to worry about is that the Report makes it clear that the Government, not the industry, should be the guarantor of honesty on the part of real estate agents. Back in 2013, I wrote a post going into some detail about the need for someone to guarantee quality of real estate agents:

The basic need here is for someone, some organization, some company to guarantee some quality of performance. This need exists no matter what the product or service. You don’t want to buy a car not knowing whether the engine will blow up as soon as you drive it off the lot. You don’t want to hire someone to do your taxes without knowing that she would be competent.

In most cases, individual companies guarantee quality. If a Ford car malfunctions, then Ford has a vested interest in fixing that car, and preventing such quality defects in the first place. In many cases, government also provides minimum standards of quality and performance, whether through actual laws and regulations or through the judicial system (you can sue someone for poor quality product/service).

When it comes to real estate, a licensed and regulated industry, the government does provide a minimum floor of performance. A real estate agent cannot perpetrate fraud or do other things that are against the actual law. Consumers can also sue in courts. But legally speaking, the photo above is not exactly against the law. I can’t imagine a court awarding damages to a plaintiff because the listing agent uploaded a photo of a giant blue monster.

In that post, I was speaking about the need to guarantee quality of service, not the ethical honesty of the service rendered. Because I had assumed, like many of us, that the REALTOR Code of Ethics combined with the laws and regulations that make REALTORS into fiduciaries of the client established the clear requirement for ethical conduct.

What the BC IAG found, instead, is that the existing infrastructure guaranteeing ethical behavior failed. Read the report, but here’s the most damning part:

A self-regulatory regime works when members of the profession hold themselves, and each other, to an ethical standard that is higher than anyone else does. It is not enough for individual licensees to act ethically; they must also hold each other to a high standard. Each member of a self-regulating industry needs to be part of the compliance regime and report misconduct promptly. The IAG found this culture is lacking in the real estate industry and that more needs to be done to reinforce the obligation for licensees to report misconduct. [Emphasis mine]

Combine that with other findings, such as the fact that regulations and guidelines were divided all over the place, and that the penalties for violation were de minimis “cost of doing business”, and the implication is clear.

The IAG recommendation is for the government to take over this “guarantor of honesty” function from the industry. For example, recommendation #1 reads:

The Real Estate Council [shall] create a comprehensive Code of Ethics and Professional Conduct and require licensees to affirm, in writing, their compliance with the Code as part of regular relicensing requirements.

Explicit rationale underlying this recommendation is that the Real Estate Boards (i.e., REALTOR Associations) ought to get to the back of the bus and mind their own business and leave the grownups to the tough task of ensuring that real estate agents behave ethically:

The IAG recognizes the important role the Real Estate Boards have played in establishing consumer protection expectations for its members, both before and after the establishment of the Real Estate Council. However, over time the role of Boards in complaints handling has evolved to a point where they are interpreting the Real Estate Council’s jurisdiction and triaging consumer complaints. That is properly the role of the regulator.

The Real Estate Council is the only regulator established by legislation with a clear public protection mandate and it must be able to do its job without duplication or interference by the Boards.

The IAG does not see mandatory reporting to Real Estate Council as completely displacing the complaints handling and discipline role of Boards. The Real Estate Council, licensees, or managing brokers may remit complaints to Boards that are more properly characterized as licensee-to-licensee disputes and involve limited to no consumer protection or public interest issues. Boards have every right to manage the conduct of their members; however, it is the IAG’s view that their role must be subordinate to the role of the regulator. [Emphasis mine]

You can’t spin this. This is a true “sit down and shut up” moment for organized real estate in British Columbia.

Related recommendations are things like requiring licensees to “fully disclose and explain their financial and non-financial incentive structures” (“If I list your home, I expect to get 20-30 buyer leads from the listing.”) and for the government to get involved in forms and contracts used in transactions. That latter point is a bigger deal than people might realize, since one of the key value propositions of an Association of REALTORS (particularly the State Associations) is providing standardized forms/contracts. See, e.g., ZipForms.

2. Broker Control and Control Over Brokers

The second major theme throughout the Report is that the broker needs to be far more responsible for the actions of his agents. The words “managing broker” appears five times throughout the Recommendations, and all are geared towards this:

22. The Real Estate Council strengthen the requirements for managing brokers to have active and direct oversight over licensees.

This one is a doozy. It’s really worth reading all of Recommendation 22:

To reinforce managing broker oversight of their licensees, the IAG recommends that the Real Estate Council implement increased managing broker supervisory responsibilities over licensees engaged by the brokerage. Proper oversight of licensees is essential to ensure appropriate adherence to regulatory requirements, ethical requirements, and competent provision of service to the public. This report includes numerous recommendations that place the managing broker in a greater oversight role, including the requirement to report misconduct, to approve disclosure of interest in trade forms, to retain offers, and other record keeping requirements.

THE IAG RECOMMENDS the Real Estate Council identify and implement ways to improve managing broker supervisory effectiveness, including a maximum ratio of licensees per supervising managing broker.

In circumstances where the suitability or solvency of a brokerage is in question and the public is otherwise at risk, THE IAG RECOMMENDS that Government provide the Real Estate Council with authority to establish a custodianship of the brokerage for a limited time, to facilitate the orderly winding down or transfer of a business where the managing broker is not able to discharge their responsibilities.

THE IAG ALSO RECOMMENDS that the Council undertake a thorough review of new business models to ensure appropriate governance and oversight of licensees and public protection. Extra regulatory vigilance is important in circumstances where new business models may not fit within a regulatory framework designed for more traditional models. New business models may necessitate the imposition of additional duties and responsibilities on owners, managing brokers, and potentially licensees. [Emphasis added]

Let’s be clear what powers the IAG wants the government to have.

First, IAG would like the government to impose regulations on the brokerage such that it becomes a de-facto extension of the regulator. The broker has to, among other things, report misconduct by one of its agents, keep all offers received on a listing of one of its agents on file, collect and maintain data and records so they are immediately available to the government upon demand, etc. The brokerage is no longer just your mentor, your partner, but also an agent of the government with the duty to keep track of your activities and report you. #HealthyRelationship

Second, the government can set maximum number of agents per managing broker. #Wow

Third, the government can take over a brokerage by putting it into “custodianship” for the purpose of winding it down. Unclear how this will actually play out, of course, but essentially, if a government bureaucrat decides that there are “questions” as to your brokerage’s “suitablity” and “otherwise puts the public at risk”… someone from the Real Estate Commission can show up at your company, tell the CEO/owner to vacate his office, and take over.

Fourth, the IAG would like the government to decide which business models are kosher and which are not. Don’t let the free market and consumer behavior decide, because that would be, I don’t know, too much freedom?

The thing is, even though the recommendations of the IAG are a bit… well, whatever you think… fact is that the problem they are trying to solve is something we all recognize and understand in the industry.

The managing broker of today is “managing” in the loosest sense of the term. The dominant recruit/retain business model doesn’t allow for a pain-in-the-ass broker who’s all up in your business all the time. The agent will just jump ship to some “agentcentric” broker who spends most of his time kissing agent ass. The whole 1099/W-2 debate even revolves around the idea that a broker can’t really tell an independent contractor agent what to do and how to do it, and if the broker does, then that real estate agent becomes an employee.

Conversations in the industry, in places like Raise the Bar Facebook group, often reduces down to some claim that “brokers need to take responsibility” for the conduct of their agents. This has always been put in terms of “brokers ought to do this voluntarily” along with some brokers boasting that they do just that and try to “establish a culture of ethical competence” and whatnot.

The fact that those conversations happen means that we all recognize that brokers exercise precious little oversight into their agents’ actions, procedures, and practices. Well, now the government has recognized it. And they’ve decided to do something about that.

Do you like it? Are you not entertained? Is this not what real estate brokerages had in mind when they chose to go down the path of “we can’t tell agents what to do”?

3. Associations to the Back of the Bus

The third worrisome theme that emerges clearly from the Report is the government more or less telling the Associations (Boards up north) to sit down, shut up, and take their crap to the back of the bus. Let me give you a few examples:

4. The Real Estate Council require licensees to provide information to consumers which clearly explains the duties owed to consumers by licensees, and how consumers can protect their own interests, before, during, and after they enter a relationship with a licensee.

5. The Real Estate Council focus more attention on the forms and contracts used by licensees, to ensure they reflect an appropriate emphasis on consumer protection and the public interest.

6. Government implement the changes it made to contracts used by licensees, requiring seller consent to contract assignments by the buyer, to all forms of contract for trades in real estate whether or not the contracts are prepared by licensees.

In theory, the Code of Ethics and the strenuous training in a “higher standard of practice” by REALTORS should have meant that consumers would have had no confusion as to what duties were owed to them by their “I Live by The Code” fiduciary agents. That the government thinks it needs to step in signals a clear failure by the Associations to live up to and enforce that standard.

Recommendations 5 and 6 ought to strike terror into the hearts of quite a few Associations. Within the industry, we know that while the MLS is the #1 reason for joining an Association at all, quite a few Associations (especially the STATE Associations) make access to standardized forms a close second in terms of value to the membership.

Now, the government is going to get all up in your bidniz as to these forms and contracts. And maybe it should, given how important they are in the conduct of a transaction. But failure to really protect the consumer interest via the forms/contracts means that Organized Real Estate has basically been told to step off. Think I’m exaggerating? Here’s the shiv into the soft underbelly of organized real estate:

Both consumers and licensees are confused about who has responsibility to regulate misconduct and to deal with consumer complaints. One result is that misconduct can go unreported to the regulator and discipline may not be delivered with the public interest as a paramount consideration. Equally concerning is the closed nature of the Boards’ discipline process. Transparency is fundamental to credible consequences and public confidence.

The IAG is aware that Real Estate Boards are considering a large-scale restructuring that would see consolidation of the Boards and rationalization of the services they offer. This initiative creates an opportune moment for industry to address overlap and confusion. A decision by the Boards to exit all quasi-regulatory functions that impact the consumer, and leave those functions to the Real Estate Council, would be the right thing to do for industry, and for consumers.

The money saved by Boards that is no longer needed to fund discipline and consumer complaint handling could be directed to provide a more proactive and consumer-oriented regulatory regime at the Real Estate Council. [Emphasis added]

Got that? In plain English here’s what the above says:

So you guys at the Association do “punishment” that’s about your own interests, not the public interest, and not for consumer protection. Plus, nobody knows what the hell the punishment was because you keep everything secret. We’re not cool with that.

Why don’t you get the hell out of the business of any kind of regulatory/consumer-protection/public interest nonsense and do whatever the hell you want with your own membership dealing with other members. We’ll take care of the consumer protection angle, and punish for real, because all you do is slaps on the wrist.

BTW, some of that money you’re going to save by getting out of the discipline business? We’ll take that, thank you very much, to fund the much larger, much more bureaucratic, government-operated system.

And just to close the loop… the IAG recommended that penalties for violating the new Government Code of Ethics are dramatically more severe:

Government increase maximum disciplinary penalties available to the Real Estate Council to $250,000 for individual licensee misconduct and $500,000 for brokerage misconduct, and increase administrative penalties to a maximum of $50,000.

Yeah, winning! Nooo….

So let us review.

• The government will take over all disciplinary activity, except for whatever inside-baseball member-to-member disputes.
• The government will have its own Code of Ethics that all licensees must pledge to uphold, and failure to do so could mean $250,00 in penalties. (One thing not in the above paragraph is the recommendation that the broker/agent be forced to disgorge any gains from activities that violate the Code — meaning, all of the profits made, plus the $250K in fines….)
• The government will look over the forms and contracts to make sure they are in compliance with what the government believes ought to be in there.

If that’s not a smack down and a “back of the bus” moment for the industry, I’m not sure what would be.

There are so many other findings and recommendations in that Report to analyze and think about. But these three themes infuse the entire Report, and I suspect that many of these recommendations will be adopted and implemented in full force by British Columbia. Not having done a particularly wonderful job of reining in the abuses by its own REALTOR members, it’s not like BCREA or CREA or the local Boards up there have a huge advantage in trying to fight the new regulations that are almost certainly on their way.

I’m sure we’ll come back to this report time and again, but I wanted to get the above three out as quickly as I could.

A Couple of Questions and Preliminary Conclusions

I do have a couple of questions about the IAG’s investigation and report.

First, the MLS is not mentioned at all, except in passing. I find that surprising since the Report itself has this to say:

There1 is no requirement for an individual who is licensed by the Real Estate Council to be a member of a local Board or the two associations. However, since only members of a Board can access MLS® (Multiple Listing Service), a critical tool in the provision of real estate services in the province, close to 95% of all real estate licensees in British Columbia are members of a local Board and, correspondingly, the provincial and national associations.

If they knew that the MLS was the reason why 95% of licensees belonged to the Board/Associations, I’m a bit surprised they didn’t try to get in there and regulate the hell out of that.

Second, one of the big recommendations of the IAG was to ban dual agency:

Notwithstanding these considerations, the IAG determined the risks to consumers of continuing to allow dual agency outweigh its limited advantages. We believe that continuing to allow dual agency has the potential to erode clear expectations and strong enforcement of licensee conduct and ethics because it is fundamentally inconsistent with a licensee’s duties and responsibilities to their client.

But it’s not clear whether that ban would happen at the individual licensee/agent level, or at the brokerage level. In most of the American states where dual-agency is prohibited, that’s at the individual agent level, not at the company level. That distinction makes agent teams possible and is the pillar on which many a brokerage revenue model is based.

There are other questions, of course, but those two just jumped to mind.

As for preliminary conclusions… what could one conclude looking at what’s going on Up North?

If Not Us, Then Them

First, I’ve given many a presentation and speeches to Associations over the past few years when I’ve pointed out that if the industry fails to really put consumers first, to live up to the word of the Code of Ethics that stress the public interest, someone else will. I wrote the following in 2013:

My take is that like Yahweh, Government is a jealous god. It does not take kindly to the idea that corporate interests can regulate themselves, at least without government oversight. In the Government’s eyes, the ability to self-regulate is a privilege, and every single instance of corporate interests deciding for themselves what is and is not in the interests of the consumer has been looked at cross-eyed by Government.

One unintended consequence of ABoR’s action here is that it draws the eyes of people who have actually been empowered by voters, acting through their elected representatives, who then setup regulators to make sure that consumers are protected from businesses. Lack of regulation results in inaccurate information that disappoints consumers? Well, let’s make sure that such industry regulations are indeed something that gets the job done, shall we? Why don’t you submit your proposed regulations to us, you know, the proper authorities, for some “oversight”, so we can make sure they’re adequate?

We have now seen this play out to the ultimate conclusion in British Columbia. American organized real estate cannot plead ignorance should this movement make its way south.

You Will Be Made to Care

Second, brokers will be made to care. The 1099/W-2 issue gets close to the heart of the issue, but the root lays in the agent-centric movement of the past 40 or so years. We now have brokers who admit frankly that their customers are their agents and spend all their time and energy trying to deliver enough value to the agents to justify the split.

Well, the IAG Report kills that entire train of logic with a vengeance. The government can and will impose duties on you, the managing broker, that you have never had before… because the public got screwed and everybody was asleep at the wheel. You might have conducted your own brokerage business with the utmost care and probity, but guess what? Because others screwed the pooch, you will now be made to care.

I find it slightly ironic that an industry that extols the virtues of entrepreneurship and independent business spirit and so on might have forgotten that everyone in it exists thanks to the grace of the government to grant them a license to be in business.

Change the Culture, Or It Will Be Changed For You

Closely related to the above is the clear statement from the IAG that the culture in real estate is not conducive to self-regulation. It’s worth reposting the paragraph from above:

A self-regulatory regime works when members of the profession hold themselves, and each other, to an ethical standard that is higher than anyone else does. It is not enough for individual licensees to act ethically; they must also hold each other to a high standard. Each member of a self-regulating industry needs to be part of the compliance regime and report misconduct promptly. The IAG found this culture is lacking in the real estate industry and that more needs to be done to reinforce the obligation for licensees to report misconduct. [Emphasis mine]

So, the IAG and the government will force that culture to change through $250,000 fines. If we cannot change our culture to one where everybody holds everyone else accountable to a higher standard, it will be changed for us by our overlords. The same observation was made about the disciplinary process and penalties within the Association world — lack of transparency, lack of clarity, and lack of real punishment with a clear focus on the public interest — has led to that culture being forced to change by submission to the Government Star Chamber with its $250K fine.

Anyhow, for years, some of us have been saying that organized real estate really needs to reform. Change or Die. Evolve or Perish. And other dire language has been used, and most folks just laughed it off as Chicken Little getting paranoid about nothing.

How’d that work out for us? Time to get on the change train maybe? #JustSayin’

Your thoughts/observations are of course, welcome as always. This got WAY long.

-rsh