New Regulatory Framework in force for social housing providers

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The Homes and Communities Agency (HCA) as the Social Housing Regulator (the Regulator) has published the changes to the regulatory framework for social housing providers, which are now in force. Such changes were viewed as necessary due to the profound changes the sector was facing in terms of finance and Julian Ashby, Chair of the HCA has said that it is the job of the HCA ‘to protect social housing assets and their public value…for the benefits of tenants, taxpayers and lenders.’ Also such changes provide ‘the preconditions for further investment and asset growth…and are needed to keep the Regulatory Framework “fit for purpose”.

What has changed?

The key changes to the Regulatory Framework include:

  • Changes to the Governance and Financial Viability Standard (G & FVS);
  • Introduction of the Code of Practice;
  • Changes to the Rent Standard; and
  • Changes to General Consent.

The scope of the G & FVS has been widened to include:

  • An obligation on registered providers (RPs) to adhere to all relevant law, which means that RPs not only need to comply with legislation but also case law, common law and statutory guidance. The Regulator is due to publish its approach in an updated Regulating the Standards;
  • An obligation to protect social housing assets so that they are not put at undue risk, which is further elaborated in the Code of Practice;
  • RPs are under an obligation to conduct business planning so that they understand their business, the operating environment, the risks and recourse to social housing assets. The RPs board must approve the control framework and review its effectiveness in achieving outcomes at least once a year;
  • RPs must also conduct detailed and robust stress testing including using multi-variate testing against economic and business risks in order to assess resilience;
  • An obligation within RPs governance arrangements to ensure an appropriate degree of skill and capability to perform;
  • RPs are also under an obligation to maintain thorough, accurate and up to date asset and liability registers;
  • Obligation for RPs to communicate with the Regulator in ‘a timely and accurate manner’, which the Code of Practice indicates that RPs should inform the Regulator ‘of any material issue which indicates that there has been or may be a breach of the Standards’;
  • RPs at least once a year are under an obligation to assess their compliance with the G & FVS and the board is under an obligation to certify in their annual accounts their compliance with the Standard.

The Regulator has introduced the Code of Practice in order to ‘amplify the requirements’ in the G & FVS. The aim of the Code is to help RPs ‘understand what the Regulator is looking for when seeking assurance on compliance with the Standard’. With regard to the Rent Standard, though the Regulator does not control this it has brought two key changes which include; changing the indexation basis from RPI to CPI and ending upwards convergence of rents. Finally the Regulator has made changes to General Consent to permit certain disposals without reference being made to the Regulator.

Impact
The changes to the Regulatory Framework will require different degrees of change for different RPs. Some may only have to package existing information as the asset and liability registers on top of existing risk analysis and management arrangements. For some RPs there will have to be a change of approach from the Board downwards to enable the organisation to demonstrate to the HCA that it is meeting the high standards the Regulator expects the entire sector to maintain.

It is to be noted that these changes have been reported as being viewed as ‘positive’ by credit rating agencies. An analyst for Standard and Poor’s which provides credit ratings for 17 housing associations said in relation to stress testing that ‘we increasingly see risk management as a key area of our analysis, particularly as associations increase their exposure to the open market, and we feel this requirement to think through stress scenarios is a positive move’. Similarly, Moody’s in a report published following the changes said that it ‘derives comfort from the updated framework’s continued focus on maintaining financial viability and on ensuring that social housing assets, the main security for bond holders, are not put at risk’. This is the same approach as outlined by Moody’s at the Forbes conference on RP diversification in late 2014.

Additionally, with only a few days in force, the Regulator has already issued regulatory judgments based on the new Regulatory Framework. In its regulatory judgment regarding Assra Housing Group Limited, the Regulator has downgraded its governance and viability rating to Properly Governed: G3 and Viable: V2. In its regulatory judgment the Regulator points out that the governance downgrade was necessary because ‘its governance arrangements have not ensured the effective operation of an appropriate strategic planning and control framework that identified and manages risks to the delivery of business objectives and compliance with regulatory standards’. Whereas in relation to financial viability, the Regulator’s assessment is that the ‘group failed to demonstrate that the risks to the delivery of financial plans were identified and effectively managed.’ In particular its business and financial planning failed to ensure sufficient liquidity and its business plans did not sufficiently consider the financial implications of risks to delivery of those plans. In this case the Regulator is working with Assra to address these issues and Assra in cooperation with the Regulator has commissioned external advisors to assist with risk management and control frameworks.

This case demonstrates that the Regulator expects RPs to understand and implement the obligations that are provided in the Regulatory Framework and failure of compliance will result in downgrading. It also shows the significance of the references in the new G & FVS and Code to liquidity and the impact of lender covenants. While the Regulator will continue to work with RPs to address issues that arise, it also expects RPs to learn from such situations and apply such learning to risk management and control frameworks.

Full details about the changes to the Regulatory Framework can be found in the Forbes Briefing, as well as the newly published Regulatory Framework on the HCA’s website. The Forbes Housing and Regeneration team has experience of assisting RP officers and Boards in complying with the Regulatory Framework in assessing specific projects or policies and processes more generally. If we can help with any queries on the new Standard and Code please contact Daniel Milnes or Lucy Worrall, call 0800 037 4628 or send us an enquiry via our contact form

Nat Avdiu

About Nat Avdiu

Nat Avdiu is a Paralegal in the Contracts and Projects team at Forbes Solicitors. Nat provides updates for clients on a range of issues including: governance, data protection and freedom of information, procurement and charity law.
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