This is the eighth edition of Learning from Regulatory Downgrades, capturing learning from Governance downgrades by the Regulator of Social Housing.
Despite COVID this year has been one of continued active regulation, including lease based/exempt providers, which have dominated much of the Regulator’s enforcement work. The Social Housing White Paper has set out ambitions for consumer regulation, although much will require legislation, and the Regulator has quite rightly tasked landlords with preparing for those ambitions in advance.
The Regulator has now taken the strongest action available to it by removing Green Park as a Registered Provider. This follows the decision of Birmingham City Council to remove its exempt status, and an earlier Regulatory Notice in 2019. This may have further significance given that other landlords have also had their exempt status questioned by the Regulator. Another provider included below, Prospect Housing, which has had 2 Governance downgrades this year, has signaled that it will cease trading in the summer.
In total action was taken or being considered this year against 12 lease based/exempt providers including 3 downgrades, 5 Regulatory Notices (all against providers with existing downgrades/notices in place) and 4 Gradings Under Review. One provider, Larch HA, entered (and exited) the Regulators Insolvency procedure. Others are already either downgraded or with Notices in place. I expect more, not less, regulatory action in the forthcoming year in this area.
Both for these providers, and for others featured in this report, there remain consistent themes around the robustness or otherwise of internal controls, risk management and stress testing. Likewise health and safety, the one area of consumer regulation consistently included in previous reports, continues to feature with failures this year including solid fuel appliances checks, electrical checks for communal areas, overdue asbestos surveys, electrical, gas and asbestos checks. One new health and safety area not previously covered is safeguarding, where there had been weaknesses in controls over third party agents.
Data featured with One Housing, which highlights the importance of quality data to support decision-making. There were also issues around the limited range of targets with Southern Housing, and the failure of their Audit Committee to have sufficient oversight of the implementation of their external and internal audit recommendations. Limited targets and governance concerns also featured in the last downgrade of the year at WATMOS where the (tenant-led) board will need to operate more strategically, and consider its capacity and skills mix of on its Board.
There were two instances where landlords (Housing 21 and Wandle HA) had overcharged rent to tenants (£3M and £320K respectively), although this is being repaid to tenants.
In all of this there remains hope. For Housing responded well to whistleblowing and Incommunities, Golding HA, Shepherds Bush, South Kesteven DC and Prospect Housing all self referred to the Regulator. Hightown HA returned to G1 within 9 months. One Housing has been open about the challenges that face it (and others too). I worked with one of these landlords, and have worked with another previously, and expect them and others to return to G1 status in the future.
12th April 2021
Regulatory Downgrades 2020/21
|RiskControls Business Planning Stress Testing||Data Rent||Leasing arrangements||Health and Safety||Governance Monitoring|
|Green park REMOVED||Removal of exempt status|
|Prospect Housing G4 (to be closed down in the summer as business model does not work) Partial self referral re murder||Weaknesses in rent setting and collection.||Failure to understand assets, contractual arrangements and needs of tenants in their homes.||Two serious safeguarding incidents show weaknesses in controls over third party agents. Overdue health and safety checks and issues with enforcing these through third party providers.|
|Prospect Housing G3||Risk Management and Internal Controls Business Planning||Lack of timely and accurate information to Board Rent Standard||Failure to have oversight of arrangements with multiple third parties who deliver landlord services on its behalf.||Governance – Board management of affairs, failure to understand issues|
|My Space G3 (new)||Stress testing and mitigation strategies Risk Management Internal Controls Business Planning||Rent standard||Long term leases with fixed annual increases, no break clauses assumes that Housing Benefit will continue to pay whatever||Governance – Board management of affairs|
|One Housing Group G2||Manage risks Align strategy to risk appetite Assurance of controls on financial and treasury information, planning and reporting.||Accurate data|
|Hightown Housing Association (Now G1)||Stress Testing not robust enough for sensitivities and scenarios, and mitigating strategies insufficiently developed.Risk Management Recovery planning||Strengthen oversight (no evidence of breach of law) as responsibility not clearly defined and reporting inconsistent.|
|For Housing G2 (following 2019 merger)||WhistleblowingInternal controls – external reviews||Whistleblowing independence of decision making – independent review of organisational structure and governance review of Board.|
|Incommunities G2||Risk and control framework following failure to implement rule changes for subsidiaries correctly. Lenders not made aware during refinancing and issuing of bond.|
|Housing 21||Risk management and internal controls (rent)||Reduced net affordable rent instead of gross rent by 1%. Overcharge to tenants of £3m. Also charged above rent cap to extra care schemes.|
|Southern Housing Group G2 (to merge with Sanctuary)||Stress testing.||Failure to monitor and report on delivery. Limited range of targets restricts ability to report and monitor performance including VFM. Failure of Audit Committee oversight of internal and external audit recommendations. Work to be done to complete Assets and Liabilities register.|
|Golding Homes G2 (self referral)||Not met statutory requirements with regard to electrical and gas safety. Strengthen controls and compliance systems to ensure Board oversight.|
|Shepherds Bush G2 (self referral)||Not met statutory requirements with regard to electrical and asbestos safety. Strengthen work already in progress controls and compliance systems to ensure Board oversight.|
|WATMOS||Needs to strengthen stress testing and limited mitigation strategies Strengthen risk management||Quality of reporting to Board.||Risk management issues include risks on health and safety objectives.||Board not operating at a strategic enough level, needs to review capacity and skills mix. Limited range of targets restricts ability to report and monitor performance including VFM.|
|Rent Standard||Data/Information to Board||Income/contractsInsolvency||Health and Safety|
|Trinity HA (already G3)||Claims majority of stock is exempted but unable to prove this.|
|Larch (second RN, under 1,000)||Lack assurance Board receiving adequate and timely information||Unable to achieve income forecasts, issues with cashflow and unable to meet lease payments. Reliant on head landlords forgoing lease payments. Creditor action meant Larch entered RSH Insolvency process, later withdrawn, but “serious failure”.|
|Westmoreland (already G4 and has admitted material uncertainty over its future)||Claims majority of stock is exempted but unable to prove this.|
|Wandle HA (already G2)||Did not fully implement 1% required by Rent Standard – overcharged tenants by £320K.|
|South Kesteven (self referral after critical audit)||Failed to meet statutory health and safety requirements. Fire: 1000 FRA actions from 2017 not carried out and failure to maintain solid fuel appliances. Electrical: No communal areas had an inspection, and just under half of properties were out of date, including some over 10 years. Asbestos: over 300 surveys of communal areas overdue.|
|Hilldale HA||Hilldale has entered into a series of lease arrangements without demonstrating that it fully understands the associated risks.|
|Pivotal HA||Claims majority of stock is TSH or SSH exempted but unable to prove this.||Limited risk and control framework.||Pivotal has entered into a series of lease arrangements without demonstrating that it fully understands the associated risks.|
Gradings Under Review (as of 31st March 2021)
Four ‘exempt’ providers under review at present
- Auckland Home Solutions Community Interest,
- Ash Shahada HA
- 3CHA and
- Concept HA CIC
- Brent Community Housing (previous RN in 2019 due to failure to submit signed statements on time)
- Salvation Army (Downgraded to G2 in 2019)
Areas covered by Regulatory Downgrades
|A. Regulation and Boards||1.||Keep up to Date|
|2.||Tell the Regulator|
|3.||Hit HCA Deadlines|
|5.||Disposal of tenanted housing|
|B. Consumer Regulation||6.||Health and Safety|
|C. Hubris – The Threat to Good Governance||9.||Comply with the Code of Governance|
|10.||9 Years Maximum|
|11.||Board Composition and Skills|
|14.||Review Your Governance|
|16.||Board management of its role|
|D. Risk, Internal Controls and Financial Planning||17.||Do Risk Properly|
|18.||Financial Planning and Capacity|
|E. Operation of the Board||23.||Severance for senior executives|
|25.||Take Expert Advice|
|26.||Run Board Meetings and Processes Properly|
|27.||Structures and Subsidiaries|
|28.||Accurate Information and reporting|
|29.||Co-operative Board Relationships|
|31.||Regulator Insolvency process|
A. 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. Likewise landlords need to ensure their reports are accurate.
Inquilab did not communicate with the regulator in a timely manner and was not transparent with us as to the full extent of the issues.
Lincolnshire Housing Partnership
However we have concluded that LHP needs to improve some aspects of its governance arrangements to ensure continued compliance, specifically in relation to the quality of data in its internal documents and regulatory returns and stress testing.
Our IDA work identified two significant data errors in LHP’s 2019 Financial Forecast Return and supporting business plan. The errors resulted in the misstatement of forecast covenant compliance and major repairs expenditure. The regulator has engaged with LHP previously regarding the quality of data supplied in regulatory returns.
- 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.
Rent remains an area of current challenge with recent examples of overcharging resulting in repayments. Issues with lease-based providers are dealt with separately.
Annual rent regulation which commenced in December 2018, has identified that H21 has reduced its net Affordable Rent1, exclusive of service charges, as opposed to its gross rents, by 1% annually as required by the Welfare Reform and Work Act 2016. This has resulted in an overcharge to tenants of approximately £3m. In addition, it has charged rents above the rent cap on a number of extra-care schemes.
The regulator lacks assurance that H21’s board regularly reviews its processes and fully understands its compliance and policy positions on rents in relation to updated regulatory and legislative requirements. H21 needs to strengthen its rent setting process, controls and board assurance to ensure it can deliver and sustain legally and regulatory compliant rent and service charges.
Although H21 has co-operated with the regulator on this matter, the regulator has not been able to establish easily the depth of non-compliance or to understand H21’s response to it.
From our review of data submitted by Wandle in its 2018/19 Statistical Data Return, we identified an increase in the average rent being charged for General Needs properties at a time when providers were required to reduce rents by 1% annually.
In response to our enquiries, Wandle has undertaken a series of investigations to assess the scale and nature of the errors. These investigations have concluded that between 2016 and 2020, approximately £320k was overcharged as a result of incorrect rent-setting.
Wandle has concluded that the majority of incorrect rents are due to either:
Misclassification of properties – units were mistakenly classified as secure tenancies and subject to the Rent Act 1977 exemption[footnote 2]; or
Failure to implement the 1% reduction in the first 12 months on some new tenancies.
- Consultation including 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. In addition providers must be able to consult tenants effectively.
The contractual arrangements entered into with third parties has fettered Prospect’s ability to undertake appropriate consultation with tenants, as required under the Tenant Involvement and Empowerment Standard.
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.
B. 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 are not subject to Governance ratings but can be issued with Regulatory Notices. It is worth noting that the Regulator does weaknesses in health and safety as a governance issue. This section now covers all health and safety issues including gas, fire, water, electrical, asbestos and lift safety as well as wider systemic issues. In addition this year featured a failure on safeguarding by a landlord.
Reviews carried out into two serious safeguarding incidents have identified weaknesses in procedures and controls of the landlord over services delivered by third-party managing agents. Prospect identified a range of overdue statutory health and safety checks but had difficulty in ensuring those were remedied through the third-party service providers.
.A recent internal audit of Golding Homes’ health and safety position found that compliance was poor, and it was unable to fully validate the compliance position due to a lack of reliable data. In respect of fire safety, Golding Homes has a statutory duty under the Regulatory Reform (Fire Safety) Order 2005, to regularly assess the risk of fire in properties where it has responsibility for maintenance. Having identified the hazards and people at risk, it is also required to take precautions to prevent the risk of fire. The regulator has learned that Golding Homes has failed to complete over one hundred high risk actions arising from Fire Risk Assessments (FRA) and that these have been outstanding for a number of months.
Regarding electrical safety, Golding Homes is required under the Landlord and Tenant Act 1985 to ensure that electrical installations are in working and safe condition both at the start of any tenancy and throughout that tenancy. Golding Homes has identified a large number of remedial actions arising from electrical safety checks which had not been completed. The overdue actions were potentially dangerous and should have been completed at the time of the electrical safety check to remove any potential risk.
RN February 2020 (G2 May 2020)
Regarding electrical safety, Shepherds Bush is required under the Landlord and Tenant Act 1985 to ensure that electrical installations are in working and safe condition both at the start of any tenancy and throughout that tenancy. Shepherds Bush has identified around 200 communal areas in its properties without evidence of an electrical safety inspection having taken place. It is also unable to locate the electrical safety certificates for over 900 individual properties. Without this information for both communal areas and individual properties, Shepherds Bush are unable to determine if there were remedial actions that should have been addressed and therefore lacks assurance that its properties are maintained in a safe condition. Shepherds Bush have reported they have increased resources to remedy the failings in electrical safety.
For asbestos safety, the Control of Asbestos Regulations 2012 require Shepherds Bush to effectively manage asbestos in non-domestic properties (which includes communal areas in domestic dwellings) by carrying out an initial asbestos management survey followed by an annual re-inspection where asbestos is found to be present. Shepherds Bush has identified that surveys had not been carried out for around 300 communal areas in its properties. Without these surveys, Shepherds Bush do not have assurance that this risk is being properly managed. Shepherds Bush have reported they have increased resources to remedy the failings in asbestos safety.
RN March 2020 (G2 April 2020)
In respect of fire safety, South Kesteven DC has a statutory duty1 to regularly assess the risk of fire and to take precautions to prevent the risk of fire. In this regard the regulator has learned that over a thousand remedial actions identified in fire risk assessments carried out in 2017 had not been completed. There have also been failings in ensuring that solid fuel heating appliances do not pose a risk to tenants. South Kesteven DC found annual inspections and cleaning of solid fuel heating appliances for a smaller number of properties had not been scheduled or completed in a timely way.
With regard to electrical safety, South Kesteven DC is required to ensure that electrical installations are in working and safe condition both at the start of any tenancy and throughout that tenancy.2 South Kesteven DC has reported that none of the Council’s communal areas had an electrical inspection and just under half of all its properties had out of date inspections, some of which were more than ten years old. For asbestos safety,3 South Kesteven has reported that nearly three hundred surveys of communal areas were overdue and should have been completed in 2019. For these reasons, the regulator concluded that South Kesteven DC has breached the Home Standard, and as consequence, there was the potential for serious detriment to tenants.
To date this is the sole instance of customer service failure breaching the serious detriment test (although there is a more recent case which also covered stock condition survey completion as the basis for repairs investment). 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 which the White Paper has also identified.
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.
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.
C. 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 recently significantly updated their Code of Governance and providers who use this will be doing gap analysis and developing action plans to ensure compliance by April 2022.
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
The new Code of Governance now identifies 6 years as the new normal, with the ability to extend by a further 3 years. Previously the 9 rule was not absolute and the Regulator would 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.
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. Being tenant-led does not remove Boards from these requirements. The Board should also ensure conflicts of interest are identified and managed appropriately.
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.
The board is not currently operating at a sufficiently strategic level to ensure that the provider’s agreed strategy reflects its current activities, and that it is being delivered in a cost-effective manner. WATMOS needs to strengthen its assurance on the capacity and skills mix on its board to ensure that it is operating with an appropriate degree of skill, effectiveness, and foresight.
- 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.
The provider has not had an external review of board effectiveness for several years.
- 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.
D. 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.
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.
- 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. Audit Committees should monitor internal and external Audit recommendations clearly and expect progress reporting.
Southern Housing Group
SHGL’s audit and risk committee has not consistently ensured adequate oversight of the implementation of internal and external audit recommendations. The Board needs to strengthen its assurance framework and ensure that its committee’s terms of reference are operating effectively in practice.
Red Kite Community Housing
Red Kite has experienced a significant financial loss as a result of a fraud due to a basic failure in its system of internal controls. Improvements are required to Red Kite’s control framework to ensure that key financial controls are robust, operating in line with established policies and procedures and with appropriate leadership oversight.
- Stress Testing
Stress testing, including impact, mitigating strategies and formal trigger points, has become more important in these uncertain times.
WATMOS needs to strengthen its stress testing to better inform its business planning. Whilst single and multi-variant stress testing has been conducted, these tests do not demonstrate resilience against some of WATMOS’ specific risks. There is also limited comparison to loan covenants. WATMOS has not identified formal trigger points at which the board would need to take action, and only limited mitigation strategies are in place.
Hightown needs to improve aspects of its risk management, specifically its stress testing and recovery planning. Hightown’s stress testing does not clearly quantify the impact of sensitivities and scenarios on the business and its mitigating strategies are insufficiently developed. Stress testing needs to be strengthened to ensure that the board has assurance that the risks stemming from adverse events, and the effectiveness of the strategies to remedy them, are clear.
- 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. May 2018
Expectations UK Limited
The regulator has identified a number of significant conflicts of interest involving individual trustees and the owners of the properties which Expectations leases. Expectations has not been transparent regarding this matter and has failed to provide evidence that the conflicts were considered and managed by the board. In agreeing that the previous Chair would stand down from his position as trustee, and be immediately appointed as Chief Executive, Expectations has failed to provide evidence that this recruitment was carried out appropriately. The regulator expects boards to take steps to return to compliance as a priority, but Expectations has failed to demonstrate that it has appointed trustees that are able to run this charitable organisation with sufficient skill and independence to do so.
Regulatory Notice September 2019
- Asset Management
Interestingly the first asset management/investment example has arisen. Although technically covered by a consumer standard this was not covered by a Regulatory Notice, instead being captured as a financial planning issue.
Yorkshire Housing Group
There is evidence to indicate some under-investment in YHG’s existing homes in recent years. Our expectation is that asset management forecasts reflect professionally sourced, reliable and up-to-date data. It has not been clear whether YHG has been using reasonable assumptions in its plans despite external stock condition survey work being commissioned and reported to its board.
E. 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.
- 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 and rigour in rule changes.
Incommunities Group Limited
IGL self-reported that it had not implemented rule changes correctly, for two of its subsidiaries, in April 2018. The error was discovered in May 2020 when the provider was carrying out work relating to further governance changes and accounts approval processes. During the intervening two-year period it refinanced and issued a bond and as a result these two subsidiaries made incorrect certifications about their rules to lenders.
IGL’s internal controls did not ensure that the new rules were implemented correctly or identify that it had not registered them with the Financial Conduct Authority. Since May 2020, IGL has worked with funders and lawyers to rectify the situation but the reliance on incorrect rules left IGL reliant on the goodwill of the group’s funders. IGL and the two subsidiaries had to ratify decisions made between April 2018 and May 2020, including in respect of its funding arrangements.
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
- Accurate Information
To provide robust challenge, boards need to ensure they have access to adequate and accurate information including targets for performance.
One Housing Group
Although the board has taken significant steps to mitigate the risks from some longstanding, legacy business activities, its decision making has not been consistently supported by accurate data. This has impacted on the board’s ability to foresee and manage these risks in a sufficiently timely way.
The quality of reporting to the board requires improvement to facilitate more effective monitoring of performance against the provider’s strategic aims. A limited range of targets in both internal and external reporting restricts the ability of the board and other stakeholders to assess strategic performance, including its record on delivering value for money.
- 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.
- Lease arrangements
Now the most rapidly expanding category, with impacts on many tenants. This paper is not going to cover the full depths of the issues involved in lease arrangements. However the issues for regulatory compliance are profound and multi-faceted and include a wide range of financial, business planning, risk management, internal controls, governance, and involvement, health and safety and rent issues. I’ve included one example below as it struck me as the pithiest of the Regulators rulings although there are others too.
My Space has experienced rapid growth in recent years. The model operated by My Space means that, whilst it has landlord responsibility for its tenants, it enters into short-term and long-term leasing arrangements with a number of third parties for properties.
Following engagement undertaken with My Space and subsequent investigations the regulator has found:
– significant weaknesses in My Space’s business planning framework;
– inadequate risk management processes and internal controls; and
– that the board has failed to manage its affairs with an appropriate degree of skill, diligence, effectiveness, prudence and foresight.
The regulator has insufficient assurance that My Space’s governance, risk management and internal control frameworks are effective or that business planning is robust. The board has failed to demonstrate it understands and is managing the risks it faces or has appropriate mitigation strategies in place to ensure the long-term viability of the organisation and protect social housing assets.
My Space has been unable to provide the regulator with a business plan that is based on appropriate and reasonable assumptions. It has no information on its long-term stock investment requirements and under-pinning information on voids and income collection is limited. We lack evidence that My Space undertakes adequate stress testing against a range of scenarios, with appropriate mitigation strategies in place, to ensure its long-term viability.
To deliver its medium to long-term viability, My Space assumes its material income source (rent) being ‘excepted’ from the requirements of the Rent Standard by meeting the specialised supporting housing criteria. We lack assurance on how the board has satisfied itself that its rents are meeting the Rent Standard.
- Regulator’s Insolvency process
We also have the second entry in the Regulators Insolvency process although, I fear, not the last.
Westmoreland Supported Housing
In July 2019, creditor action taken against Westmoreland (who dispute the debt) led to the provider entering into the regulator’s insolvency process and the commencement of a moratorium. A combination of subsequent creditor forbearance, and actions taken by the provider and by the regulator, meant that the creditor action was withdrawn.
However, this is a serious failure. As a result the regulator has taken steps to increase capacity and skills on Westmoreland’s governing body while it works through the challenging circumstances it faces by appointing 3 new officers to the board under its statutory powers.
Larch’s business model relies on continued cash income at the right level, and at the right time, to enable it to meet its obligations. Consistent with our previous notice published in November 2019, Larch continues to be unable to achieve its income forecasts and this has placed significant stress on its cashflow. As a result, Larch remains unable to meet its obligations under its lease arrangements as and when they fall due; a situation that has been on- going for a significant period. Larch is currently reliant on the continued support of its head landlords forgoing lease payments in order to continue to trade.
In May 2020, creditor action taken against Larch led to the provider entering into the regulator’s insolvency process and the commencement of a moratorium. A combination of subsequent creditor forbearance, and actions taken by the provider, meant that the creditor action was withdrawn. However, this is a serious failure.