Learning from Regulatory Downgrades 2018/19
Learning from Regulatory Downgrades
This is the sixth in a series of Learning from Regulatory Downgrades that I have published on an annual basis.The Regulator has issued over 120 governance downgrades for housing associations over the past 6 years. This report seeks to explore why those downgrades have happened and the common threads that Board Members, councillors, residents and executives should be looking to learn from.
About 15 years ago I read Julian Ashby’s seminal “Learning from Problem Cases” – a study of why housing associations went into supervision. What I learned was the importance of sound governance both in housing associations and for housing regulation. When I became a senior housing regulator I started any speech on regulation with a clear recognition that good governance was key to tenant involvement and services for which I was responsible.
This report details the areas that the Regulator has highlighted in the Regulatory Judgments (RJs), backed up by direct quotations from those named RJ reports. I have both updated and trimmed the number of quotes (otherwise this report would become unwieldy) but the earlier versions remain available for those who like fuller detail. Alternatively you can read all the downgrades directlyon the Regulators website.
21 February 2019
Commentary on 2018/19
The past 10 months have seen the emergence of providers with contracted lease arrangements for property. Much of this is used for clients with specialist support needs delivered by third party providers. Funds from private investment funds and Real Estate Investment Trusts (REITs) have support this growth. Starting with the Regulatory Notice issued to First Prioritythere have been other instances of issues arising with risk, stress testing, governance, conflicts of interest and consumer standards including health and safety. The Regulator’s Sector Risk Profile(104 – 110) covers this in more detail.
Otherwise the key five topics remain, often interlinked. Board Governance, risk, management internal controls and stress testing are core issues for governance. Boards need to continue to be alert on all four and ensure that they apply critical thought to how they ensure their approach is, and is seen, to be robust. The encouragement given to Housing Associations to develop, and their own sense of duty to provide more homes need to be balanced with understanding of the housing market and emerging risks post-Brexit.
Health and safety continues to be of concern with fire and water safety featuring more prominently this year. It has been noteworthy that no action has been taken on fire safety, which may be in part due to the regulator waiting for any action to be taken through the statutory legal processes as it has done previously. Local authorities only feature once this year. I expect regulator activity on health and safety and for Local Authorities to change in the future.
Issues coming to the fore include financial reporting, probity and disposal of tenanted housing. Deregulation measures now mean that providers do not need to seek permission from the Regulator before disposing of homes. However they do have to undertake due process when considering disposals.
Governance Downgrade Table
|Board Governance and systems||Risk management||Internal Controls||Stress Testing||Legislative and regulatory requirements
|Health and Safety||Financial Reporting||Probity||Other|
|Advance Housing and Support||X||X|
|Connexus Housing||X||X||X||X||Development Capacity|
|Durham Aged Mineworkers||X||X||X||X||X||
|Greenfields Community Housing||X||X||X|
|Lincolnshire Housing Partnership||X
|Moat Housing||Disposal of tenanted housing|
|NSAH (Alliance Homes)||X||X||X||X||Business Planning
Care and Support Subsidiary
|One Housing Group||X|
|Wandle Housing||X||X||Business Planning
|Inclusion Housing Ltd||X||X||Lease arrangements|
|Knowsley Housing Trust||X||X||X||X||(x)|
|Suffolk Housing Society||X||X||X||X||X|
|Sustain (UK) Ltd||X||Lease arrangements
Issues re non recognition of specialist supported housing for rent purposes,
|Trinity HA||X||X||X||X||Lease arrangements|
|Westmoreland Supported Housing||X||X||X||X||X||Lease arrangements|
|Ongo Homes||X||X||Executive remuneration settlement|
Areas covered by Regulatory Downgrades
|A. Regulation and Boards||1||Keep up to Date|
|2||Tell the Regulator|
|3||Hit HCA Deadlines|
|4||The Rent Standard|
|5||Disposal of tenanted housing|
|B. Consumer Regulation||6||Health and Safety|
|C. Hubris – The Threat to Good Governance||13||Comply with the Code of Governance|
|14||9 Years Maximum|
|15||Board Composition and Skills|
|18||Review Your Governance|
|20||Board management of its role|
|D. Risk, Internal Controls and Financial Planning||21||Do Risk Properly|
|22||Financial Planning and Capacity|
|E. Operation of the Board||26||Severance for senior executives|
|28||Take Expert Advice|
|29||Run Board Meetings and Processes Properly|
|30||Structures and Subsidiaries|
|31||Accurate Information and reporting|
|32||Co-operative Board Relationships|
|33||Governance and New Challenges|
- Regulation and Boards
Under co-regulation, boards are responsible for ensuring the Regulatory Framework and Standards are met. This means understanding – and meeting – those requirements, as well as ensuring a professional approach to the Regulator and regulation. The Regulator consults formally, and informally, on changes to the Regulatory Framework and Regulating the Standards. Boards should keep abreast of such consultations and the impact of subsequent changes.
- Keep up to Date
Boards need to ensure that they are working to the current version of regulatory requirements. These include the requirement to assess regulatory compliance annually and publish that assessment in their annual accounts.
Consequent risks to the organisation were exacerbated by a culture at a senior level which lacked awareness and understanding of the organisation’s governance arrangements and the regulatory environment within which it operates.
- Tell the Regulator
It’s important to tell the Regulator as soon as you become aware that things are wrong. Too often, landlords thought they wouldn’t tell the Regulator about problems until they had tried to put them right first. Or wait until their In Depth Assessment was due.
Luminus Group Ltd
The board did not inform the regulator
In July 2015 the Health and Safety Executive issued MHA with a notice of contravention relating to the quality of gas safety and servicing work undertaken across the whole of its housing stock. This was considered by the Board at the time, but the Board failed to consider whether this breach of statutory responsibilities should be communicated to the regulator in line with the expectations of the standard.
- Hit HCA Deadlines
Ensuring that reports and returns to the HCA are on time and accurate is a basic building block in the relationship with the Regulator. Boards can ensure that these returns are reported to boards and monitor their timeliness. Accuracy is essential for both the relationship and the integrity of the board.
Colne Housing Society
We found that the quarterly return for March 2016 had been completed incorrectly with an overstatement of forecast cash flow outgoings. Also, it was not possible to reconcile the treasury position reported to the board and that reported to the regulator through the quarterly returns. Colne’s most recent financial forecast regulatory return described a less favourable financial position than the business plan agreed by the board in May that it was supposed to replicate.
These findings are indicative of a lack of overall control and review of submitted data which has resulted in a failure to submit a valid financial forecast return to the regulator by the specified deadline.
- The Rent Standard
The rent standard is economic regulation, although not particularly high profile. Housing Associations still need to comply with it.
The regulator’s engagement on rents led to the identification of a control failure that had remained undetected by Teign for a number of years. Errors were made in rent setting, which resulted in a breach of the Rent Standard and a significant number of tenants being overcharged. This related to key data relied upon by both internal and external sources. We have concluded that this control failure represents an area of governance weakness.
- Disposal of tenanted housing
Deregulation removed the requirement to seek permission from the regulator before disposal of stock, including tenanted stock. However this did not remove the responsibility of providers to go through due process when considering disposal.
Our judgement is that Moat has not adequately reflected the changed operating environment, arising from deregulation measures which removed the regulator’s powers to give consents for disposals, in its decision making. There was insufficient board oversight of the disposal. As a result, the board was unable to assure itself that the disposal met legal and regulatory requirements. Moat’s assurance that the disposal met its charitable objectives was inadequate. Although legal advice was taken in respect of the transaction, Moat did not obtain specific legal advice regarding the charitable considerations arising from the disposal. Due diligence of the proposed purchaser was insufficiently robust to demonstrate accountability to tenants and obligations to protect social housing assets. The disposal decision was delegated solely on financial criteria. No objective report covering the wider implications of the sale was presented to decision makers to provide assurance that the disposal met Moat’s charitable objectives and other regulatory expectations.
- Consumer Standards
- Health and Safety
While consumer regulation is not actively regulated, it undergoes a ‘serious detriment’ test. Nearly all of the breaches of consumer standards feature health and safety. This also applies to Councils who own housing stock and two of the examples in this section feature Councils who were issued with Regulatory Notices. Councils are not subject to Governance ratings but can be issued with Regulatory Notices.
Trinity has confirmed that it was unable to evidence that it is meeting its statutory Health and Safety obligations thereby potentially putting its tenants at risk. A number of properties, housing vulnerable tenants, have already been moved to other providers with a shortened tenant consultation period which is a clearly suboptimal outcome.
Reside has not demonstrated at all times a complete understanding of the extent of its responsibilities under health and safety legislation
- Gas Safety
Gas safety remains the most frequent, but not sole, cause of breaching the serious detriment test.
Luminus Group Ltd
Although the gas safety inspections were typically overdue for a relatively short period of time, the number of homes that had been without valid certificates for at least some period was extremely high. This had been caused by failure to have adequate policies and systems in place to ensure gas safety inspections were carried out on time.
MHA had completed the annual gas safety checks, but it had not carried out servicing to ensure the fittings and flues were safely maintained. MHA’s gas safety processes did not require a servicing element and so the failure to meet the legislative requirements applied across all of MHA’s stock.
- Fire Safety
However it is not just gas safety but fire safety that breaches serious detriment.
Beyond Housing (although situation arose from pre-merger self report by Yorkshire Coastal Housing)
Prior to the merger, YCH made a self-referral to the regulator in relation to fire safety. It told us that a large number of fire risk assessments (FRAs) had passed their review date, and that a small number of properties did not have an FRA in place. The majority of these properties had been overdue for around eight months, but a small number had been overdue for more than a year. The issue affected hundreds of YCH tenants. YCH also told us that it had concerns about the quality of the FRAs carried out and was concerned that all hazards had not been fully identified, and that there was limited evidence available to demonstrate that actions identified had been completed.
- Electrical Safety
And electrical safety too.
Lincolnshire Housing Partnership
With regard to electrical testing, the regulator concluded that LHP had failed to have in place effective systems and an effective programme of planned work to identify electrical safety risks and so had breached the Home standard. A previous external assessment of a sample of electrical inspections for Boston Mayflower properties found a high proportion of the sample failed quality requirements. Following the merger, LHP commissioned a comprehensive review which raised concerns about the lack of valid or in-date certificates for the vast majority of Boston Mayflower properties. Quality control checks found a number of errors in both the categorisation of works, and completion of certificates.
- Water safety
And finally water safety.
Arun District Council
In relation to water safety, Arun District Council has a statutory duty under the Control of Substances Hazardous to Health Regulations 2002 to identify and assess the risks of exposure to Legionella and to implement any necessary measures to control risk. As with fire safety, until recently Arun District Council did not have a programme in place to carry out risk assessments and only did so in response to concerns raised. Arun District Council has now developed a programme to carry out those risk assessments but until that work is completed, it cannot fully implement measures to control any risks to tenants.
Regulatory Notice August 2018
To date this is the sole instance of customer service failure breaching the serious detriment test. This initially resulted in a G3 rating and reoccurrences (despite reassurances) have resulted in a downgrade for the resulting merged Group. It also implicitly references failure of complaints as a serious detriment issue. The reoccurrence sets a challenge for the Regulator to not take reassurances from downgraded landlords alone as proof of resolution. There is also an issue for the Regulator and Housing Ombudsman to address in cases on this kind where complaints show a systemic failure in a landlord.
Circle Anglia Limited
In implementing its plan to rationalise suppliers and create fewer, larger contracts for responsive repairs and planned maintenance, Circle has failed to control delivery of a core service and respond effectively to serious underperformance. This is consistent with a systemic problem in the organisation’s risk management and internal controls.
For example, in relation to Circle 33’s 8,000 homes, over a period of three months Circle reported that less than 20% of urgent and emergency repairs were completed on time and elsewhere less than 50%. By way of further example, referrals received by the regulator, including information about a significant number of outstanding statutory notices relating to disrepair, provided evidence that for over a year tenants, including vulnerable tenants, had experienced significant difficulties in getting essential repairs done, either on time or at all.
Clarion Group (which now includes Circle)
During early 2016 the regulator had received assurance that the performance of Circle’s emergency and urgent repairs service in east London, which had been the subject of a regulatory notice from April 2015, had improved significantly and was then at an adequate level. The regulator therefore removed the regulatory notice.
The referrals received after that point have related to a broad range of issues, including: performance of heating and hot water repairs services,more general repairs and maintenance including, in some cases, services provided to vulnerable and potentially vulnerable tenants, difficulties in contacting Circle to raise issues and complaints and perceived poor responses by Circle to complaints, leading to a very large number of complaints being outstanding for long periods of time.
This followed Circle merging its customer contact operation into a single call centre and in parallel implementing a new customer relationship management IT system in June 2016. These referrals include a large number of what the regulator terms “statutory referrals” from councillors and MPs, as well as complaints from individual tenants. Collectively, they relate to hundreds of individual repairs issues raised by tenants, and hundreds of complaints about Circle’s handling of repairs and accessing Circle’s services. A high proportion of those complaints have been unresolved for long periods of time.
- Tenancy Standard
Showing the need to comply with tenancy law for all tenants including evictions and licencees.
WM had failed to ensure that the implementation of its eviction processes provided licensees at this scheme with the level of protection required by law. WM Housing had failed to ensure that the implementation of its eviction processes provided licencees at this scheme with the level of protection required in law. That meant that all licencees at this scheme may have been at risk of an unlawful eviction. WM Housing has provided assurance that the issues identified only relate to this one scheme, but the regulator also noted that this issued had continued for up to two years.
September and October 2017
Westmoreland Supported Housing
In addition, the board has failed to ensure its tenancy management is effective prompting intervention from a local authority and the regulator after Westmoreland issued eviction notices to a number of its tenants to enable it to hand back properties rather than carrying out a more managed process. The way the board handled this situation and the subsequent sub-optimal outcome that resulted is a significant contributory factor in the regulator’s conclusion that Westmoreland’s governance arrangements are not effective.
- Hubris – the Threat to Good Governance
Governance remains key to the effective running of housing associations. However, for some landlords, rules are ‘meant to be broken’ – or ignored. Often they experience other difficulties as hubris clouds their vision of what their role should be.
- Comply and Publish (Non)Compliance with the Code of Governance
Housing associations are able to choose an appropriate Code of Governance. Having chosen their preferred code, there is then a requirement to ‘comply or explain’. Some associations have not explained at all, others have not given a satisfactory explanation for their non-compliance. The National Housing Federation updated their Code of Governance in 2015 and this now provides a stiffer test for compliance in line with issues raised in previous versions of this report.
Luminus Group Ltd
Luminus is also unable to substantiate that it is compliant with its chosen Code of Governance in relation to the adequacy of its delegations framework and board recruitment.
To support continued effective delivery, the board needs to strengthen its capacity to review and challenge its own governance arrangements. It needs to ensure that it reviews its governance performance in a rigorous and evidence-based way. Recent reviews of compliance with its code of governance have not been thorough and the board has not explicitly confirmed its compliance.
- Nine Years Maximum
Terms of office are a maximum of 9 years, however the ‘9-year rule’ is not an absolute rule and there may be reasons why, exceptionally, some board membership might exceed that period. However this must be discussed with the Regulator and put in the context of a sensible succession strategy. In most cases it isn’t adequate to cite “continuity” as a reason for non-compliance, as a joint letter to Chief Executives from the HCA and the NHF in February 2014 made clear. The Regulator will engage with landlords and agree sensible ways forward.
Yet some landlords didn’t agree sensible ways forward and in some cases had members with 20 or even 40 years board membership. What was revealing was that excessive length of membership resulted in poorer governance and overly close relationships between board and staff. The answer is simple – put a succession plan in place in advance of hitting the 9-year rule.
Tuntum Housing Association Limited
Tuntum does not comply with the provisions of its chosen code of governance in relation to maximum terms of office for board members. The code specifies maximum terms of nine years but Tuntum has made rule changes which extend this to a 12-year maximum. The association currently lacks clear succession plans for the chair and other board members. In addition, the criteria used by the board for extending terms of office should be clearly specified.
- Board Composition and Skills
As housing associations diversify in their operations, boards face a growing range of issues on which they need expertise. Examples include development, marketing, finance, commercial activity and treasury management. You need to ensure the board covers all the necessary bases, and not be afraid of change, including change in your governing documents, to ensure this happens. The Board should also ensure conflicts of interest are identified and managed appropriately.
Durham Aged Mineworkers
Not all DAMHA board members are recruited and assessed on a skills basis, aligned to the needs of the business and its risk profile. The regulator has concluded that this hinders DAMHA’s ability to manage its affairs with an appropriate degree of skill and foresight and impacts on the overall capacity of the board to lead and control its activity. DAMHA needs to strengthen its approach to board member appraisal and renewal so that the board has, and maintains, the skills required to manage its business.
Sustain’s board membership did not previously include any independent non-executive members and the provider was not compliant with its chosen code of governance. Inherent conflicts of interest had arisen as a result of related party transactions to companies owned by Sustain’s executives.
- Annual Appraisals
Having got your board in place there should be a regular mechanism for appraising their effectiveness and identifying areas for personal development and any gaps in board skills.
Regular formal board and executive appraisals have not been carried out in recent years, although these have recently been completed with external support. The IDA identified that board skills assessment; succession planning and some aspects of reporting arrangements also require improvement.
- Board size
Less is more. Make sure your board is 12 or less. There’s a strong body of research published showing that boards that are too big are less effective. It can be hard for larger boards to admit that they are too big and, even harder, that some board members will have to go. The Regulator will want to know if an oversize board has a plan to achieve compliance, and within a reasonable timeframe.
Bournemouth Churches Housing Association Limited
The size of BCHA’s board exceeds the maximum specified in its code of governance. It has no plans to achieve compliance and the regulator does not have assurance that it has carried out a robust assessment which adequately supports any case for non-compliance.
- Review Your Governance
There should be a regular cycle of reviewing the board and its governance arrangements to ensure that they remain fit for purpose. Having done the review it also helps to take it seriously and implement the recommendations. And, as with many of the matters included in this report, it can be useful to commission (and take note of) external advice.
It has not addressed in a timely manner, recommendations on the governance framework and Board effectiveness made by a governance review undertaken in 2015
- Board Payment
Board payment should be proportionate – and published. Excessive board member payments will be damaging for that landlord (and the sector more widely).
Bedfordshire Pilgrims Housing Association Limited
BPHA’s code of governance also states that where board members are paid, the agreed payment levels must be appropriate to the organisation’s size, complexity and resources. The regulator lacks assurance that in reaching a decision to increase payments to non-executive directors to levels above sector norms, the board gave adequate consideration to remuneration in relation to BPHA’s size and complexity. In addition, the regulator does not have sufficient assurance that BPHA is meeting the provision of its code that where board members are paid, payment should be linked to specific duties against which performance can be assessed.
BPHA did not satisfy the provision of its code that where board members receive remuneration, details of these payments should be published on a named basis.
- Board Management of its role.
Boards have to fulfill their roles successfully.
Suffolk Housing Society
The regulator lacks assurance that Suffolk’s board is managing its affairs with an appropriate degree of skill, diligence, effectiveness, prudence and foresight. Suffolk’s board failed to demonstrate an effective approach to reporting, quantification and management of key risks.
There is also insufficient evidence that the audit and risk committee has an effective relationship with the board: significant issues have not been effectively escalated and progress on the implementation of agreed actions arising from completed internal audits has not been consistently monitored.
Investigations undertaken by the regulator obtained inadequate assurance over Trinity’s long term viability, the effectiveness of its risk management and internal controls and that the board has managed Trinity’s affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight.
The Trinity board has failed to effectively manage the risks the organisation faces and has not ensured there is access to sufficient liquidity at all times. This has resulted in it breaching certain lease terms due to its inability to make payments as they fell due. In addition cash flow projections presented to the regulator demonstrated it had not been able to secure access to sufficient liquidity to meet future lease payments.
The fact the board has failed to manage its significant risks, has ceded control to third parties and has allowed tenants to potentially be put at risk is a fundamental failure of governance.
- Risk, Internal Controls and Sound Financial Planning
Managing risk is now central to the work of landlords and core to the role of effective boards. Ensuring that there are effective internal controls in place safeguards staff, tenants and board members.
- Do Risk Properly
It is essential for the business to have a robust risk framework in place, monitored and used to drive mitigation and improvement. This includes when managing strategic change.
Cosmopolitan Regulatory Judgment
The group’s approach to risk was based on an over-simplification of presenting issues, coupled with too little scrutiny of new deals taking place after the merger. This, alongside an inadequate control environment, especially in relation to the development function, exposed the group to unacceptable levels of risk. In particular the board’s decision to fund its investment programme through a sale and leaseback arrangement was based upon a wholly inadequate analysis of risk and a rudimentary sensitivity analysis, coupled with a failure to consider alternative plans. ..the group failed to effectively manage the risks to delivery of its plans.
Inclusion Housing Community Interest Company
Inclusion has provided insufficient assurance that its current risk management and mitigating actions are commensurate with its risk profile. We lack assurance that steps within its control should risks crystallise would ensure its on-going financial viability and that social housing and tenants homes are protected over economic and policy cycles.
Joseph Rowntree Housing Trust
JRHT has experienced a number of preventable control failures which calls into question the effectiveness of the organisation’s approach to risk management. Although risks had been identified, the trustee body failed to ensure sound systems of internal control were in place to manage risks relating to safeguarding and covenant and regulatory compliance. Once the trustee body understood that risks had materialised, it took appropriate remedial action. However, it needs to improve the overall effectiveness of its risk management and controls assurance frameworks to ensure it has a better grip on the management of such key risks.
- Financial Planning and Capacity
When planning for the future boards will need to ensure that plans are robust and well founded. They also need to ensure that there is sufficient capacity to undertake the financial work required, particular where ambitious development programmes are considered.
NSAH (Alliance Homes)
Alliance Homes needs to enhance the board’s oversight of business planning and strategic risk management to reflect a step change in the ambition reflected in its strategy. The regulator lacks assurance that the board is using stress testing appropriately to reflect its revised risk appetite and inform key decision making. There is a lack of clarity about the amount of financial headroom within the latest business plan, which is being used to support planning for a significant increase in development activities. This plan does not provide the regulator with assurance that the board has adequately developed mitigating strategies and triggers appropriate to Alliance Homes’ development ambition.
However following the IDA we have concluded that WHA needs to demonstrate continued capacity to manage its affairs within an appropriate robust and prudent business planning framework to ensure continued compliance. This includes providing assurance on the embedding of recent changes to the business planning framework and evidencing ongoing improvement in the management of strategic and financial risk
Westmoreland Supported Housing
The Westmoreland board has not managed the risks to the business effectively and has been unable to provide the regulator with financial information that was based on appropriate and reasonable assumptions. It has provided insufficient evidence that it currently has a deliverable business plan. The organisation is also in a position where it is reliant on continued financial support from a third party while it attempts to restructure its business, to ensure its medium to long term viability. This is clearly not a desirable or sustainable position, nor one that meets the regulator’s standards.
Together Housing Group
Three successive annual reports from the group’s external auditors have raised concerns about the capacity of the group’s finance function to undertake the financial work required for a group of THG’s size and complexity. The board responded to recommendations made in 2014 and 2015 with measures to remedy the deficiencies. However, these remedial actions have not been fully effective and residual risks stemming from inaccurate or untimely financial reporting remain.
Further evidence of capacity issues within the finance function, and in particular the supervision of it, are instances where the group’s controls have failed to ensure that financial data returns met regulatory expectations in terms of quality and comprehensiveness.
Severn Vale Housing Society
Financial capacity is a key factor limiting SVHS’s aspiration to develop. The rationale for delivering an aspirational development programme is not fully established yet and assumes funding primarily through asset disposals. SVHS needs to do further work in understanding the return on its assets to better inform future asset disposal plans.
- Internal Controls
It’s important that there are robust internal controls, ensuring the business is well run and the organisation’s money is handled properly. Central to this is the correct use of Internal Audit, which gives assurance that the organisation’s internal controls are effective.
Tower Hamlets Community Housing
THCH’s governance arrangements have failed to deliver an effective risk management and internal controls framework. In October 2015 the organisation uncovered potentially material issues relating to the site acquisition, procurement and delivery of two significant development schemes; one of which was nearing completion, the other was empty pending future development. These issues were not identified by the day to day operation of internal controls or risk management frameworks, evidencing that those processes were ineffective in practice.
Orwell needs to strengthen its overall risk management and internal controls assurance framework to ensure that it enables the board to manage its affairs effectively. Orwell has reviewed its internal audit framework and is making changes in response to the findings and recommendations. However these still need to be fully implemented and embedded to enable Orwell to evidence that internal audit arrangements make an effective contribution to internal control.
- Stress Testing
Given the increased risks posed by welfare reform and rent -1%, and the pressure on Associations to develop more homes, stress testing has become more important and challenged by the Regulator.
Suffolk Housing Society
Stress testing is inadequate with mitigation strategies and actions not fully developed and a lack of clarity about the expected financial impact of potential mitigations.
Our review of Abbeyfield’s stress testing suggests that improvements are also required. Stress testing undertaken has been rudimentary with only three single sensitivity tests carried out. No cost or other mitigating factors appear to have been assessed. Overall the quality of stress testing does not provide assurance that Abbeyfield has the capacity to cope with a range of risks should they crystallise.
- Probity and Conflicts of Interest
All involved, including Board Members and senior Executives, must ensure both personal and cultural commitment to upholding probity.
Greenfields Community Housing
Having received a series of allegations relating to property services and procurement, Greenfields informed the regulator that it had commissioned an independent investigation. The investigation found instances in which procurement processes and internal controls and gifts and hospitality policies, had not been followed at a senior level. The investigations also revealed some evidence of wider cultural shortcomings where some staff had not acted in line with Greenfields’ own policies and that this behaviour had been left unchallenged for a period.
Westmoreland Supported Housing
There are inherent conflicts of interest at board level. The chair of Westmoreland is employed in a senior role by the same third party that is providing the cash support, management services and sourcing properties as part of Westmoreland’s growth strategy. The board has yet to provide compelling evidence that appropriate probity policies and arrangements were in place to effectively manage these conflicts.
In addition to this there had been long standing, inherent conflicts of interest at board and management level which Trinity was unable to demonstrate it was managing effectively. The regulator has therefore concluded the board and management of Trinity have failed to ensure that its affairs are managed with an appropriate degree of skill and independence.
- Operation of the Board
As well as meeting basic rules on good governance, boards need to establish and maintain proper working relationships with staff, ensure meetings are well run and seek and take notice of external advice.
- Senior Executive Severance Pay
In a nutshell: Don’t give your departing chief executive or senior executive a big severance package (or allow it to happen).
Four landlords have been downgraded for such packages with substantial reputational damage both to them and the sector. Associations need to ensure their approaches are watertight. In particular, regularly review your employment policies and executive contracts well away from the emotion created by the departure of a hard working stalwart.
Evidence gathered by the regulator, following this self-referral, confirmed weaknesses in governance, and in particular in the effectiveness of Ongo Homes’ board oversight and risk management. Ongo Homes failed to be appropriately sighted on decisions taken by its unregistered parent and as a result did not ensure it was in a position to prevent key risks from materialising.
Although the decision making on this matter did not sit with Ongo Homes, there were opportunities for Ongo Homes’ board to identify and manage the risks for it associated with executive remuneration, including the potential for discretionary payments to be agreed. The controls and mechanisms in place to manage risks of this nature, which included the chair of Ongo Homes’ board being a member of the unregistered parent’s board, were not operated effectively by Ongo Homes.
As a result, Ongo Homes’ board has found itself liable for significant discretionary financial costs without visibility or effective input to the decision-making, and has failed to safeguard its reputation, and that of the sector.
During a significant period of restructuring the board exercised weak governance and internal control when agreeing executive contracts and severance payments to outgoing executives. In doing so, the board has failed to safeguard its reputation, and that of the sector.
- Clear Relationships
Be clear about the respective roles of board members and executives. You need to have a good working relationship based on those clearly defined roles, don’t delegate too much to staff and be particularly clear about roles where chief executives are also board members. It also means being precise about delegation to Board working groups and committees.
Equity Housing Group
There is a lack of clarity regarding the respective roles and responsibilities of the board and its committees. This has resulted in duplication, and also, in some instances, insufficient board attention on matters which have been over-delegated. It was not clear that the board had adequately addressed past weaknesses in establishing clear accountability throughout the structure.
We have concluded that the board’s strategic focus has been diminished due to its continued involvement in operational issues following the establishment of a new executive team. The division of responsibility between the executive and the board needs to be re-examined and firmly established.
- Take Expert Advice
There will be times when boards cannot have all the skills they need within the set of board members to provide adequate expertise and advice when considering courses of action. It is right to seek external advice in these situations and use that to support decision-making. It is also important that, having sought advice, boards should heed it and act accordingly.
Great Places Housing Group Limited
It did not always recognise the need to seek independent expert advice and did not always make the best use of advice it did receive
- Run Board Meetings and Processes Properly
Board meetings should be run properly – and minutes should be taken. This is a fundamental matter of record keeping.
Saffron Housing Trust Limited
The board of Saffron had been advised that defects in governance processes and a failure to comply with its rules meant that some board members had not been appointed properly. The failure had occurred over a period of several years. Significant decisions were made during this period involving third parties and funders and there was uncertainty about the validity of all the decisions that had been made at those meetings given some board meetings had been inquorate.
- Structures and Subsidiaries
It is essential to have a firm grip on complex structures and subsidiaries. Obviously this is driven, in part, by the Cosmopolitan experience but also by the increasingly diverse nature of the sector in setting up subsidiaries for tax efficiency and/or creating new lines of income. Boards should be aware that there are potential risks in complex structures and take account of the overall impact of that risk and potential impact on social housing run by the landlord. This includes clarity about apportionment of running costs.
Broadacres HA Ltd
Since its acquisition in 2012, the main commercial subsidiary’s financial performance has been poor. The BHA board has failed to effectively monitor the risks associated with this activity and there are inadequate mitigation strategies in place to manage them. Foreseeable risks have crystallised and the unregistered non-charitable subsidiaries are increasingly reliant on the continued support of the registered parent. As a result BHA is exposed to a combination of material losses, impairment and write offs. The structural arrangements in place, including intra-group lending and parental guarantees between group members, has resulted in BHA accepting the majority of the downside risk and its on-lent investment at risk has increased to £18m
NSAH (Alliance Homes)
Improvements are also required to the board’s oversight of its care and support activities. There is a lack of transparency in reporting to board on the overall financial performance of the loss-making care subsidiary and in-house support activities. Although this issue is not material to our financial viability judgement, we lack assurance on the true costs of providing these services, with no clear rationale for the level of overheads being recharged.
- Accurate Information
To provide robust challenge, boards need to ensure they have access to adequate and accurate information.
Westmoreland Supported Housing
The quality of information supplied to the board is often very poor and significant improvements are required to improve performance reporting and risk management information to ensure effective control and management of the provider’s activities. The regulator has concluded that it therefore has limited assurance that Westmoreland has an appropriate, robust and prudent business planning, risk and control framework in place.
Wirral Partnership Housing
The IDA found weaknesses in some elements of WPH’s financial reporting. WPH needs to improve reporting on loan covenant compliance and subsidiary finances to allow the board to manage its affairs with greater diligence and foresight. WPH has started to make improvements to ensure that the board has improved oversight and control in these areas.
Knowsley Housing Trust
Evidence gathered by the regulator during the course of its IDA confirmed weaknesses in governance, and in the effectiveness of board oversight and scrutiny including incidents of inadequate reporting. It also found that the KHT board did not have sufficient oversight of activities taken in other parts of the group and as a result, KHT was unable to demonstrate that key risks were effectively managed. It is apparent that services provided by group companies were a contributing factor to the failings, but KHT did not exercise its rights as set out in the intra-group agreement when services fell below the required levels.
- Co-operative Board Relationships
To operate effectively board members need to be able to work together successfully.
Aldwyck Housing Group Limited
However, there has since been evidence of dissension among board members which has exacerbated concerns about governance. As a consequence the regulator has concluded that it does not have sufficient assurance that Aldwyck currently has the capacity and capability to exercise effective control over the provider’s affairs.
- Governance and new challenges
And whilst skills are important to met new challenges, such as new growth, it is equally important to ensure that boards ensure that all areas are robustly monitored.
Equity Housing Group
The 2014-17 business plan reflects a step change in EHG’s aspirations and risk appetite which it recognises and describes as an “ambitious growth programme.” The board has failed to enhance its governance and risk management arrangements to ensure appropriate oversight and control during this period. In particular the board did not ensure appropriate arrangements for the oversight and monitoring of the group’s treasury position. In June 2014 this resulted in only six months of available funding and a requirement to renegotiate a gearing covenant with funders to enable the group to increase facilities in order to deliver its plan. In doing this EHG was in breach of its treasury management policy which requires loan facilities to be drawn on demand equivalent to 12 months net capital expenditure. The board was unaware it had breached its treasury management policy
Firstly, the board has recognised that Radian’s development function capabilities are not yet adequate to support its development growth strategy following a series of abortive schemes. Further expansion of new development has been delayed whilst the board puts in place the required skills, systems and structures needed to deliver its plans.