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Why Require a Licensing System?

The Benefits of a Real Estate Regulatory Program

Overview

Wherever they occur in the world, real estate transactions have certain common characteristics. First, in residential transactions, the buyer and seller are usually making one of the most important financial decisions that they will make in their lives. Second, both commercial and residential real estate transactions usually involve third-party brokers or agents who, for a fee, facilitate the transaction for one or both of the parties. Third, real estate transactions often encompass complex matters such as financing, transfer of ownership, application of real property laws or transactional customs that are beyond the common experience of the general public.

For these and other reasons, jurisdictions around the world have established governmental or quasi-governmental entities that promote consistency and fairness in real estate transactions, ensure competency of real estate professionals and protect individuals, as well as real estate and related financial markets, from unlawful, dishonest and abusive practices. These regulatory controls also provide a means by which participants can compete in an industry in which the "rules of the game" apply to all.

Once applicants are licensed by a real estate regulatory authority, they are generally free to compete in the real estate industry without undue governmental interference because, as a general rule, ARELLO® jurisdictions do not set the amount of fees that real estate licensees may charge for their services or become involved in fee disputes between licensees.

Professional and occupational real estate licensing programs that are derived from governmental authority in the United States, Canada and many other counties around the world vary in the manner in which they are organized and empowered to act. Nonetheless, they all share one consistent goal: The protection of the public.

Establishing Initial Qualifications

One of the most important elements of any real estate regulatory program is the establishment of minimum standards that are designed to equip new licensees with the basic skills and competencies needed to guide buyers and sellers through successful real estate transactions. Licensing jurisdictions impose various education and related testing requirements to validate a license applicant's knowledge of real property concepts and applicable real estate laws, rules and regulations. In most ARELLO® jurisdictions, the licensing process is complemented by laws that prohibit applicants who are lacking in "good character" from entering the real estate profession, such as persons convicted of certain types of crimes.

Through the administration of these standards, jurisdictions create a means by which unlicensed, and therefore unqualified, individuals do not have the opportunity to profit from the trust invested in them by an unwary public.

Ensuring Ongoing Competency

Most real estate regulatory jurisdictions impose a mandatory continuing education requirement that ensures the ongoing competency and knowledge of licensees, relative to recent changes in real estate laws and accepted practices. Completion of continuing education usually coincides with license renewal requirements. Some jurisdictions engage in the qualification of approved continuing education providers and mandate the specific course content that must be presented. Others simply identify the subjects that must be studied.

Among jurisdictions that require continuing education, it is a generally accepted principle that such requirements are crucial to an effective regulatory system and provide equal benefits to licensees and members of the public.

Defining Responsibilities and Expectations

Legislative enactments or other governmental orders that create real estate regulatory agencies usually include transactional practice standards that apply to all real estate licensees. For example, many ARELLO® jurisdictions have developed "agency relationship" or "brokerage relationship" laws and regulations. These laws define the legal relationship between licensees and the parties to a real estate transaction. They also serve to provide each with a clear understanding of the duties that the real estate licensee will be expected to perform in the transaction. For example, brokerage relationship laws may require licensees to exercise reasonable skill and care, promptly present all offers and counter offers, disclose material information to the parties and act in the best interest of the client or customer, rather than in the licensee's own interests. Beyond these general standards of conduct, real estate regulators usually have the authority to promulgate more specific transactional rules, such as those requiring the use of approved contractual forms and defining how money belonging to others is to be handled and protected.

Real estate licensees know that these sometimes intricate rules and regulations provide more benefit than burden because they establish transactional norms, create a foundation upon which to build effective internal business practices and provide an opportunity to compete in a balanced, consistent industry.

Providing Public Protection Through Ongoing Enforcement

Government-authorized real estate commissions, councils and boards generally exist as an outgrowth of a jurisdiction's constitutional or other inherent power to protect its citizens.

The principal goal of public protection is secured by laws that vest real estate regulatory agencies with the authority to sanction licensees for violations of the licensing laws. These "disciplinary" powers usually include the authority to investigate allegations of unlawful conduct, provide a fair hearing to prove those allegations and impose sanctions for violations. Sanctions can range from involuntary termination of the license to less invasive rehabilitation requirements, such as additional education or practice monitoring requirements. In some ARELLO® jurisdictions, real estate regulatory authority extends to the initiation of criminal proceedings. Even if limited to the imposition of administrative disciplinary sanctions against licensees, virtually all ARELLO® jurisdictions cooperate on some level with criminal enforcement authorities, as circumstances warrant.

In many jurisdictions, the goal of public protection is also served by the enforcement of laws that require licensees to maintain errors and omissions insurance, thus assuring that licensees will be financially responsible for unintentional errors they may make in real estate transactions. In some jurisdictions, these laws are complemented by recovery fund programs that provide compensation to members of the public who are financially injured by licensees.

By identifying, investigating and prosecuting licensees who violate the licensing laws and rules, as well as enforcing financial responsibility laws, the public interest is protected on an ongoing basis and both licensees and members of the public can enjoy the benefit of an increased sense of trust in the real estate industry.

Providing Transparency and Fairness to Licensees and the Public

Unlike private industry associations that establish their own internal ethical standards, educational courses and marketing support programs, governmentally authorized regulatory agencies are usually subject to mandates that guarantee the open and fair administration of the license laws. In this way, even though real estate regulatory agencies may wield significant delegated legislative or other governmental authority, there is built-in assurance that when a regulatory agency acts, licensees are treated impartially and with a level of transparency that allows the public to know how the agency is performing its duties. Some examples:

  • Many regulatory agencies are comprised, in part, of licensees whose experience and reputation in the industry earn them appointment to serve as a decision-making and/or advisory board of the agency. Most regulatory agencies however, include one or more "public members" who are appointed to ensure that the general public has a voice in agency decision-making processes. Upon appointment to serve on the board, members are usually required to follow strict laws prohibiting conflicts of interest or other improper conduct.
  • Administrative procedure laws usually apply to agency proceedings in which a licensee is accused of misconduct and may suffer disciplinary sanctions. Depending on the laws of a particular jurisdiction, these usually include advance notice and the right to a fair hearing, including numerous procedural protections against unfair treatment. Also, disciplinary actions taken by a regulatory agency are usually subject to some form of review by a court of law.
  • The agency's delegated authority to promulgate transactional and other rules is usually tempered by limitations on the scope of such regulations. Agencies that adopt rules are also usually required to follow defined procedural steps to ensure that the regulation is needed and within the agency's authority to act.
  • "Open Meetings" and "Open Records" laws usually bind the agency to practices that ensure that members of the regulated industry and the public have access to and, in certain situations, are guaranteed the right to participate in agency decision-making proceedings.
  • The manner in which real estate regulatory agencies administer the licensing laws are usually subject to periodic review by the legislative body or other authority that empowered the agency to act. This process allows the higher authority to certify that the agency is conducting its affairs within the scope of the specific powers that were delegated to it.

In these and many other ways, real estate regulatory agencies empowered with governmental authority are supported by the benefit of limitations that will ensure the fair and impartial administration of the license laws and support the core objective of protecting the public.

Capturing Efficiencies and Supporting the Real Estate Industry

A properly structured real estate regulatory agency can capture various efficiencies that support a sound system of industry oversight, as well as a healthy marketplace.

  • Contributing to Consistent Regulation in Related Fields—Some ARELLO® jurisdictions are responsible only for the regulation of real estate salespersons, brokers and entities, while others also regulate related industries such as real estate appraisal, mortgage brokerage, property inspection and subdivision development. Regardless of the breadth of their authority, regulatory agencies are usually required to ensure that their regulations and policies do not conflict with laws that are applicable to other related industries. This, and the enhanced cooperation and communication that can occur between government agencies that regulate related fields, can contribute to an absence of conflicts in the application of all real estate-related laws.
  • Financing the Agency—In most ARELLO® jurisdictions, regulatory activities, staff compensation and other operational expenses are met in whole or in part by the licensing fees charged by the agencies. Since the payment of licensing fees is required periodically, an agency's funding stream is relatively constant, subject, of course, to varying economic conditions. In this way, the agency's strategic planning is supported by future funding that can be reasonably anticipated. An increasing number of real estate regulatory bodies are fully funded by licensing fees, thus eliminating the need for funding from other governmental sources.
  • Fostering the Health of the Real Estate Industry—Generally, industry members accept licensing fees and compliance with the licensing laws as necessary costs of doing business. Most embrace the proposition that a sound regulatory licensing program is a necessary component of a healthy real estate market. In fact, some private industry associations require licensure as a condition of membership. Also, individual licensees, industry associations and other stakeholders routinely take advantage of legislated access to regulatory decision making processes, such as promulgation of agency rules, in order to provide input that encourages the adoption of standards that are reasonable and cost-efficient.

Summary

In light of recent economic challenges around the world, there is general consensus that appropriate regulatory oversight of real estate and related financial markets is essential to a vibrant economy. There is also little question that, as the real estate industry becomes more global in reach, jurisdictions all over the world will experience an increased need to ensure that their citizens are protected and that their economies are supported by an effective real estate regulatory system.

About ARELLO®

ARELLO®, the Association of Real Estate License Law Officials, is comprised of official governmental agencies and other organizations that issue real estate licenses or registrations and regulate real estate practices around the world. The mission of the association is to support member jurisdictions in their administration and enforcement of real estate licensing laws and their efforts to promote and protect the public interest within the real estate industry.

Numerous ARELLO® resources address issues surrounding the creation of real estate regulatory agencies. Studies such as ARELLO's "Guidelines for Establishing a Real Estate Regulatory Program" and its "Model License Law" are available to interested jurisdictions. Please contact ARELLO® for more information.

Association of Real Estate License Law Officials
8361 S. Sangre De Cristo Road, Suite 250
Littleton, CO 80127 USA
Telephone: + 303.979.6190
Facsimile: + 303.979.6187
E-mail: mailbox@arello.org

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