Learning from Regulatory Downgrades 2017

Learning from Regulatory Downgrades

 

Over 90 Housing Associations have received Governance Downgrades in the past 4 years. Find out why here.

Over the past 4 years the Regulator has issued some 90 governance rulings following downgrades for housing associations. This report seeks to explore why those downgrades have happened and the common threads that landlords should be looking to learn from.

 

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.

 

In this updated version I have seen the first reappearances of previously downgraded associations. However I’ve been more pleased to note that the overwhelming majority of associations respond positively and make progress willingly on the issues identified by the Regulator.

 

This version also echoes some of the more explicit expectations set out by the Regulator in 2015 in the revised Regulatory Framework and associated Code of Practice. The Code includes a requirement that Registered providers shall assess their compliance with the Governance and Financial Viability Standard at least once a year. Registered providers’ boards shall certify in their annual accounts their compliance with this Governance and Financial Viability Standard.”

 

Some issues continue to reoccur – risk, internal controls and consumer safety. Unhelpfully hubris issues, which I had originally identified in 2014, have reappeared, with an unhelpful ‘we know best’ attitude resulting in downgrades on multiple counts including not notifying the regulator when things go wrong, not complying with Codes of Governance, ignoring the 9 year rule, poor quality information to Boards and weak Board challenge.

 

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 full detail. Alternatively you can read all the downgrades directly on the HCA website.

 

 

Introduction

 

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 the services for which I was responsible.

 

Three years ago, in my then role as Vice Chair of Wulvern, I started thinking about co-regulation and how boards could seek assurance that they were regulatorily compliant. I knew that the Regulator had become more active and had issued a range of rulings. But thinking back to Julian’s work, I didn’t know of anyone who had sought to capture it and use it to inform good governance in landlords.

 

So I sat down and read all the recent governance rulings. I started to understand that there were common threads running through the RJs and that articulating these threads would help boards, executives and others trying to ensure compliance, and effectiveness.

 

This is an updated version of the original report and includes new information from regulatory downgrades until the end of March 2017.

 

 

 

Phil Morgan

 

April 2017

 

www.philmorgan.org.uk

 

phil@philmorgan.co.uk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Executive Summary

 

Under co-regulation it is boards that have the responsibility for ensuring that their landlords meet the regulatory standards. This report helps highlight a number of areas where boards, and the staff working with them, can learn from where others have failed.

 

This includes boards ensuring they are clear about regulatory requirements, that they are compliant with them and produce all necessary reports and statements (e.g. VFM) in an accurate and timely manner. They need to take account of consumer standards including health and safety of their tenants. They need to ensure that risk is well covered and that they have effective internal controls.

 

Boards need to ensure that they meet their own Code of Governance and that they operate effectively. The Code of Governance helps ensure that boards are run properly. Too often in this report it appeared that hubris prevented boards from implementing basic rules to ensure compliance with their own agreed Code of Governance.

 

Finally, boards also need to ensure they operate effectively, establishing clear relationships with staff, seeking and taking expert advice, ensuring they provide robust challenge to the executive, work together effectively and are able to meet new challenges.

 

Using this report will help Associations in meeting their annual assessment of compliance and in preparing for In Depth Assessments by the Regulator.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A. Regulation and Boards    
  1 Keep up to Date
  2 Tell the Regulator
  3 Hit HCA Deadlines
  4 The Rent Standard
B. Consumer Regulation    
  5 Health and Safety
  6 Gas Safety
  7 Fire Safety
  8 Repairs
B. Hubris – The Threat to Good Governance    
  9 Comply and Publish

(Non) Compliance

with the Code of Governance

  10 9 Years Maximum
  11 Board Skills
  12 Annual Appraisals
  13 Board Size
  14 Review Your Governance
  15 Board Payment
C. Value for Money Statements    
  16 Have a robust VFM approach

and publish openly

 

D. Risk, Internal Controls and Sound

Financial Planning

   
  17 Do Risk Properly
  18 Financial Planning and

Capacity

  19 Internal Controls
E. Operation of the Board    
  20 Chief Executives
  21 Clear Relationships
  22 Take Expert Advice
  23 Run Board Meetings

and Processes Properly

  24 Structures and Subsidiaries
  25 Robust Challenge
  26 Accurate Information
  27 Co-operative

Board Relationships

  28 Governance and

New Challenges

 


  1. 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.

 

  1. Keep up to Date

 

Boards need to ensure that they are working to the current version of regulatory requirements. The most recent changes were made in 2015 and include the requirement to assess compliance annually and publish that assessment in their annual accounts.

 

Gallions Housing Association Limited

 

In making its decisions, the board referred to regulatory requirements that have not been in place for some time as the basis of its decision-making. The board failed sufficiently to take into account the current regulatory framework and in particular the requirement that registered providers’ governance arrangements should ensure they safeguard the reputation of the sector.

 

North Lincolnshire Homes Limited

Evidence from attending a board meeting and reviewing board papers has not provided sufficient assurance that the board fully understands its role in relation to meeting the regulatory standards.

January 2015

 

  1. 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. Failure to declare non-compliance of economic standards, including the Code of Governance, is also a breach of those standards.

Luminus Group Ltd

The board did not inform the regulator

March 2017

 

Manningham HA

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.

February 2017

 

Tower Hamlets Community Housing Limited (THCH)

THCH has not communicated with the regulator in an accurate and timely manner. The regulator was not informed of the material issues when they were identified in October 2015 but approximately two months later. In addition, a number of the returns to the regulator contain errors, including material misstatements of the provider’s financial position.

February 2016

  1. Hit HCA Deadlines

 

There are deadlines and they should be kept to!

 

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. This includes late filing of accounts which has resulted in recent Regulatory Notices being issued to ‘small’ (under 1,000 properties) landlords.

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. The return had been presented to the audit committee prior to submission to the regulator, to explain differences in format to reflect recent changes to accounting standards, but no changes in the underlying figures were highlighted at that stage.

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. Colne is working to address this identified weakness and has commissioned external advisors to undertake a review of the controls in place to monitor and report on data.

September 2016

 

Thirlmere Housing Co-operative Limited

The regulator has noted that Thirlmere Housing Co-operative Limited has failed to submit signed financial statements within six months of the latest accounting period, despite repeated reminders.

September 2015 Regulatory Notice

  1. The Rent Standard

 

The rent standard is economic regulation. With the emphasis on governance and financial viability through the ratings, it’s important not to forget that housing associations also need to comply with the rent standard.

 

East Thames Group Limited

 

ETG reported to the regulator in the autumn of 2012 that it was not fully compliant with the Rent standard in that just under 1,000 homes did not have rents at the required levels. When this was queried with the group it indicated that a larger number of homes were non-compliant, in part because it had misinterpreted relevant guidance. This did not give the regulator assurance about the accuracy of ETG’s reported position or its overall application of the rent influencing regime guidance.

 

Network Housing Group Limited

 

Network has not fully complied with the requirements of the Rent Standard concerning 153 properties where, because of errors in base capital values used in calculations, rents were charged in excess of the maximum permitted by the standard for a number of years. A further 509 supported housing properties were charged rents in excess of NHG’s policy. The issues have led the regulator to question controls within the group, and specifically the basis upon which the Board gained assurance on the accuracy of rents charged.

 

  1. Consumer Standards

 

  1. 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.

Blackpool Council

The regulator has received evidence of a breach of the Health and Safety at Work Act 1974 which led to tenants being exposed to the risk of serious harm. The Court concluded that the structural flaws in the balconies were present for a significant period of time and the provider failed to heed multiple warnings. This is clear evidence of a breach of the Home Standard in respect of the requirement to meet all applicable statutory requirements that provide for the health and safety of the occupants in providers’ homes.

 

Orbit Housing Group

In July 2015, Orbit reported to the regulator that, following an internal investigation, it believed it was in significant breach of Health and Safety legislation. The situation had arisen following a restructuring of the two Subsidiary Operating Associations within the Group during 2013/14. From April 2014, health and safety performance management information was inadequate: systems were not consistently followed or utilised by those responsible for their implementation. This was a failure of operational internal control and also board oversight by Orbit because there was ineffective challenge as a result of the lack of information during 2014.

November 2015

  1. Gas Safety

 

Gas safety remains the most frequent, but not sole, cause of breaching the serious detriment test.

 

Bolton at Home Limited (BH)

 

In October 2015 BH reported to the regulator that, following a planned internal audit, it had identified a significant number of out-of-date gas safety certificates. The situation had arisen because property management information was inadequate and there was a lack of accountability for property data within the organisation. This was a failure of internal control and also of board oversight. In some cases the certificates had expired a number of years previously.

 

February 2016

Redditch Borough Council (RBC)

RBC contacted the regulator to inform us that, following a meeting between its legal services team and repairs and maintenance staff, it had identified a significant number of out-of-date gas safety certificates. In some cases the certificates had been expired for a long time.

RBC instigated an internal audit investigation. The audit found that the issue arose due to inadequate contract management, failures in recording and incomplete records and contractor failure. RBC is undertaking a review of arrangements for contractors and methods of reporting.

November 2015 Regulatory Notice

 

Manningham HA

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.

February 2017

 

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.

March 2017

  1. Fire Safety

However it is not just gas safety but fire safety that breaches serious detriment.

Tower Hamlets Community Housing

In May 2016 THCH reported to the Regulator that it had potentially breached its statutory duty to take precautions as it had failed to implement a large number of very high and high risk actions arising from Fire Risk Assessments. THCH told the Regulator that there were several hundred actions categorised as either very high or high risk, relating to hundreds of properties, and that in a number of cases, these actions had been outstanding for periods of more than two years. THCH said that tenants had been put at risk from the failure to complete the outstanding actions but told the Regulator that there had been no injuries as a result.

March 2016

 

 

 

St Vincent’s HA Ltd

In July 2016 St Vincent’s reported to the Regulator that an internal audit had identified that it had potentially breached the statutory duty to take precautions as it had failed to implement a large number of very high and high priority actions arising from Fire Risk Assessments. St Vincent’s told the Regulator that there were a few thousand actions categorised as either very high or high priority, relating to a few hundred properties, and that in a number of cases these actions had been outstanding for a number of months. St Vincent’s said that tenants had been put at risk from the failure to complete the outstanding actions but told the Regulator that there had been no injuries as a result

 

Orbit Housing Group

The regulator has separately concluded that failure to implement a large number of outstanding high risk actions from fire risk assessments for periods exceeding two years breached Orbit’s statutory duty under the Regulatory Reform (Fire Safety) Order 2005 and that it is proportionate to conclude there had been a breach of the Home Standard which had the potential to cause serious detriment to Orbit’s tenants.

November 2015

 

  1. Repairs

 

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 blindly take reassurances from downgraded landlrods 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

….the regulator has reached the view that this exceptionally poor provision of repairs and maintenance has been made possible or contributed to by serious and enduring failures in, or in the operation of, Circle’s strategic planning and control framework such that Circle did not adequately manage or mitigate the strategic and operational risks inherent in the delivery of that service.

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.

The regulator’s assessment of the material relating to the delivery of the repairs service to tenants in the London area covering 13,000 homes (Circle 33 and Old Ford Housing Association) is that it represents a chronic failure by Circle to ensure delivery of a satisfactory repair service to those tenants. 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.

April 2015

 

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.

December 2016

 

  1. Hubris – the Threat to Good Governance

 

As with Julian Ashby’s earlier report, governance remains key to the effective running of housing associations and there are a number of areas where compliance can be achieved very easily. However, for some landlords, rules are ‘meant to be broken’ – or ignored. Often, these are the same landlords who experience other difficulties as hubris clouds their vision of what their role should be.

 

  1. 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.

March 2017

 

Pierhead Housing Association Limited

 

During recent engagement it has acknowledged non-compliance regarding….failure to report both its level of compliance and explanation for deviations from provisions of the Code.

 

Tower Hamlets Community Housing Limited

 

THCH’s code of governance requires a public statement of compliance with the code, and a reasoned statement about areas where it does not comply. While the association has made such a statement, recent disclosures have been incomplete.

 

 

  1. 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 in most of these cases 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 well in advance of hitting the 9-year rule.

 

Bournemouth Churches Housing Association Limited

 

BCHA does not have an explicit plan for board succession. Some members of BCHA’s board have been in office in excess of the maximum nine years allowed by a provision of the code. As a consequence, the regulator considers the independence of the board could be compromised by a lack of challenge to long-standing practices and thinking, which may lead to risks to effective leadership and control.

 

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. The regulator considers this weakens the board’s ability to challenge the executive and review long-standing practices.

 

  1. Board 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. This was an issue with nine landlords and often core to failings of their boards.

 

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. This is one of the reasons why board renewal and fixed terms of office are important, the skills needed five years ago are not necessarily the skills that will be required in five years time.

North Devon Homes

The regulator has concluded that NDH has not been able to evidence sufficiently that its governance arrangements enable it to manage its affairs with an appropriate degree of effectiveness and foresight. NDH has recognised the need to strengthen its board and has been working towards achieving this over the past 18 months.

November 2016

 

Shepherds Bush

Improvements are required in the assessment of board skills in relation to business need, and in the training and appraisal processes for board members.

April 2016

 

Orwell Housing Association Limited

 

Orwell’s business strategy involves complex partnership working and development within an increasingly challenging economic environment. However, Orwell has not demonstrated that it has adequately assessed the skills of the board as a basis for planning ahead to ensure that it will maintain the necessary balance and expertise to deliver its objectives and maintain compliance.

Tuntum Housing Association Limited

The regulator’s previous judgement also required additional assurance from Tuntum in relation to board skills, succession planning and structured renewal to support its growth and increased risk appetite in the increasingly challenging operating environment. Tuntum has yet to provide a sufficient level of assurance in these areas

  1. Annual Appraisals

 

Having got your board in place there should be an annual mechanism for appraising their effectiveness and identifying areas for personal development and any gaps in board skills.

 

It is surprisingly common to find associations which operate an “alternate years” or even a triennial appraisal process.

 

 

Hastoe Housing Association Limited

 

Board members have been subject to individual appraisal every three years

 

Tower Hamlets Community Housing Limited

 

The regulator has concluded that THCH needs to strengthen board assessment and renewal processes to ensure that its board will maintain the skills and expertise required, both now and in the future, to deliver its business strategy.

 

 

  1. 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.

 

Tower Hamlets Community Housing Limited

 

The size of THCH board exceeds the maximum specified in its code of governance. The board has 16 members, of whom eight are elected tenants. This structure has constrained skills-based recruitment to the board. In retaining a board of this size, THCH has not adequately considered whether it could better utilise its committee structure to support a smaller, strategic board.

 

 

  1. 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.

 

Manningham HA

 

It has not addressed in a timely manner, recommendations on the governance framework and Board effectiveness made by a governance review undertaken in 2015

 

February 2017

 

 

 

Pierhead Housing Association Limited

 

Despite evident problems Pierhead has not undertaken a review of its governance arrangements since October 2010. It has not done any work to assure itself on its level of compliance with its chosen code of governance.

 

 

  1. Board Payment

 

Board payment should be proportionate – and published.

 

There are too many occasions outside housing when people awarding themselves money has caused reputational damage. The same applies within social housing – excessive board member payments will be damaging for that landlord (and the sector more widely). Board payments should be published on a named basis too – allowing for transparency and accountability and identifying differing payment levels for different board roles.

 

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.

 

  1. Value for Money Statements

 

The very public downgrading of 14 associations in February 2014 for failing to meet the VFM standard, plus the letter notifying the vast majority of housing associations that they were at risk of non-compliance, was a wake-up call for the sector. Landlords will want to look at recent best practice and advice. The Regulator is reviewing its approach, partially in the light of sector led approaches to VFM, and will consider a new VFM standard later this year. This is expected to be less prescriptive.

 

  1. Have a robust VFM approach and publish openly

 

 

 

Shepherds Bush HA

Strategic ownership of value for money by the board is weak, a robust self-assessment was not published when required and there is limited understanding of SBHA’s return on its assets. There is limited evidence that across the stock base there is an understanding of differing returns on assets and this impairs the board’s ability to make informed investment decisions.

April 2016

 

Wrekin Housing Group

WHG cannot demonstrate that the group meets the Value for Money (VfM) standard. The self-assessment is limited to WHT and although there was evidence that VFM was well understood in the context of WHT, there is a lack of assurance that evidence has been properly considered in making decisions on the use of assets and resources at a group level

November 2016

 

Tower Hamlets Community Housing

In addition, for the second year in succession, the regulator has concluded that THCH has not published a robust self-assessment which sets out in a way that is transparent and accessible to stakeholders how it is achieving value for money in delivering its purpose and objectives. There was limited evidence to demonstrate THCH has an understanding of its asset base and a number of improvements identified in the previous self-assessment remain outstanding.

March 2016

 

  1. 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.

 

  1. 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.

 

 

 

One Housing Group

 

In addition, the role played by the board and committees in risk management needs to be strengthened by improved reporting, particularly in relation to treasury and liquidity risk. There is insufficient evidence that the board can rely on the adequacy of its stress testing work to have assurance that mitigation strategies in place are appropriate and effective.

 

July 2016

 

 

Bolton at Home (BH)

 

BH needs to embed recent changes made to its risk assurance framework, including integrating internal control arrangements and improve governance control over a key risk area (data integrity). Improving data integrity is a fundamental part of BH’s IT strategy, however governance oversight and hence reporting of progress with implementation of the IT strategy is infrequent. BH needs to embed recent changes made to its risk assurance framework and improve governance control over this key risk area. Data integrity has not been sufficiently considered via the new risk management arrangements, despite being identified by BH as a key risk.

 

July 2016

 

C&C

 

C&C needs to strengthen its existing risk management framework to ensure it can evidence a more strategic approach to the monitoring and management of risk. This is particularly important as C&C has to manage significant new risks associated with its change programme. The programme involves strategic change on a scale that C&C has not previously experienced, entailing a switch away from loss-making care business streams to the provision of high-quality sheltered housing for the over-55 age group

 

January 2017

 

 

Shepherds Bush HA

 

In particular stress testing reporting which was limited to a small number of risks and one multi-variate scenario. The impact on covenants was not clearly articulated, leading to a lack of clearly linked and appropriate mitigation strategies.

 

April 2016

 

Magna Housing Group Limited

….while the board approves annually the provider’s risk management policy and a risk matrix appended to it, there is a lack of evidence that this process involves a strategic review of key risks, controls and assurance. The board does not, for example, evidence that it reviews key risks such as welfare reform regularly. Furthermore, the lack of clear prioritisation of risks within the risk matrix hinders the open strategic debate of key risks by the board and undermines its ability to fulfil its role in this area. This means that there is a lack of sufficient evidence that Magna has a robust risk management framework led by a board which demonstrates a clear understanding of its role

February 2016

 

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.

 

 

Tuntum Housing Association Limited

 

Aspects of Tuntum’s risk management need to be improved to support continued compliance with our governance expectations. We have insufficient assurance that the board has clear oversight of the key risks to the delivery of its strategic objectives. The association’s risk map does not adequately identify whether controls have mitigated identified risks to an acceptable level. Nor does it update the board on the action to manage exposures.

 

  1. 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.

 

 

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.

 

December 2016

St Mungos Community HA

we had insufficient assurance regarding the organisation’s control and compliance environment, as well as the delivery of effective scrutiny and oversight of key risks by the board and audit and risk committee. While the organisation had maintained a focus on the delivery of frontline services, IT systems, back office functions and internal controls were not aligned with the larger merged organisation and risks it needed to manage. However, we continue to have concerns about St Mungo’s internal controls and systems for preparing timely and accurate data and reporting to underpin the board’s decision-making and its regulatory returns

July 2016

Chapter 1 Charity Limited

 

In terms of governance, allowing the organisation to reach the point where it was unsure it had access to sufficient liquidity and was potentially in breach of a funder’s covenant represents a continuing failure of control on the part of the board and executive. Although this situation was eventually avoided, the lack of adequate systems in place to monitor the cash position and covenant compliance is a failure of the business planning, risk and control frameworks at the most basic level.

 

Chapter 1 has been engaged in crisis management and has therefore failed, within an acceptable period of time, to put in place an adequate strategic plan and the financial, risk management and internal controls frameworks that should underpin it. Neither has Chapter 1 been able to make sufficient progress against the terms of a voluntary undertaking to address the issues identified in the earlier regulatory judgement.

 

The regulator has been unable to gain sufficient assurance that the business plan demonstrates Chapter 1 has a viable, independent future. The regulator will continue to engage with Chapter 1 until an acceptable route is found to ensure that the provider can comply with the regulatory standards.

 

September 2015

 

Manningham HA

 

 

 

  1. 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 (externalised or internalised) Internal Audit, which gives assurance that the organisation’s internal controls are effective.

 

Habinteg

 

However, the review highlighted significant weaknesses in Habinteg’s processes and controls across a number of areas and that the back-up arrangements in place for storing emails did not meet business requirements

 

February 2017

 

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.

 

March 2016

 

  1. 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.

 

  1. Chief Executives

 

In a nutshell: Don’t give your departing chief executive a big severance package.

 

Three landlords have been downgraded for such packages, failing to put it place challenge from the board, consideration of VFM and potential reputational risk. Thus highlights the need for appropriate challenge from the board outlined earlier and the dangers of excessively long terms of board membership.

 

In particular, regularly review your employment policies and executive contracts well away from the emotion created by the departure of a hard working stalwart.

 

Great Places Housing Group Limited

 

The board of GPHG has exercised weak governance when agreeing executive contracts and severance payments to an outgoing executive. The roles of the remuneration committee and board in scrutinising and agreeing matters of executive pay was not clear and as a result proposals were not effectively scrutinised and challenged. The lack of challenge was compounded by close working relationships formed as a result of the long service of a number of board members.

 

Severn Vale Housing Society Limited

 

The board of SVHS did not demonstrate adequate control or effectively assess risks in its consideration of the early retirement of the Chief Executive. The organisation’s early retirement policy had not been revised since the transfer date of 1998 and the board had not identified the risks of operating a significantly out of date policy. In failing to review this policy the board exposed the organisation to early retirement requests with the potential to result in significant cost and reputational risk. There was insufficient challenge by the board of the proposed level of compensation and no consideration of whether this complied with regulatory standards and the board’s own code of governance.

 

 

  1. 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 been precise about delegation to Board working groups.

Curo Group

The regulator does not have assurance that Curo is able to sufficiently evidence that it can manage its affairs with an appropriate degree of effectiveness, and this includes a lack of assurance around the maintenance of clear roles, responsibilities and accountabilities for the board and chair. Improvements that need to be made include a simpler and more transparent governance structure with clear roles and accountability within it, a reduction in board size and an enhanced functioning of the non-executive/executive relationship.

May 2016

One Housing Group

 

However, we have insufficient assurance regarding the transparency and accountability of OHG’s governance arrangements, specifically the delineation of roles and responsibilities and the clarity of its scheme of delegation.

 

July 2016

 

 

Metropolitan Housing Trust Limited

 

The issues set out above [which related to Governance, financial management and risk management] were exacerbated by poor management of governance processes such as the lack of proper delegations to the finance committee, clear roles for executives on the board and failure to take appropriate action after reviewing compliance against the code of governance, and the effectiveness of governance arrangements.

 

Pierhead Housing Association Limited

 

Relationship difficulties at senior management and board have led to disputes which have diverted the leadership’s attention away from directing and controlling the organisation’s business.

 

Saffron Housing Trust Limited

 

There was….inappropriate delegation of key expenditure by the board to the executive. This was compounded by management failures to comply with requirements of the Audit Committee.

 

 

  1. 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.

 

Gallions Housing Association Limited

 

The board failed to take timely legal advice and did not make best use of the advice which it received.

 

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

 

 

 

 

  1. 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.

 

September 2016

 

 

  1. 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 that the Regulator will be sensitive to both the overall impact of that risk and potential impact on social housing run by the landlord. In the Regulator’s summary of responses to the consultation in October 2014. There have also arisen concerns about Registered Providers operating within a Group structure and how these need to ensure they are able to protect social housing assets.

 

Wrekin Housing Group

 

WHG needs to improve the effectiveness of its governance arrangements to enable it to manage the business at a group level more effectively and strengthen its oversight and control of group risks. WHG could not demonstrate that effective arrangements are in place to ensure appropriate oversight of key risks within the context of a cohesive group strategy. Risks are identified at a subsidiary level, with those ranked more highly then being combined into a group risk assessment. Risks are not assessed against group strategic objectives. This approach does not clearly identify and prioritise risks that will have the greatest cumulative impact on the group as a whole. Stress testing is limited to the impact on WHT.

 

November 2016

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

February 2017

 

North Lincolnshire Homes Limited

The group structure has, of its nature, created a network of board inter-relationships. The regulator has insufficient assurance that the NLH board is wholly clear about its status and position within the group. There are both relationship and reporting dilemmas which have not yet been fully resolved.

Evidence from attending a board meeting and reviewing board papers has not provided sufficient assurance that the board fully understands its role in relation to meeting the regulatory standards. This is in the context of it being a subsidiary member in an otherwise non-regulated group.

January 2015

 

Cosmopolitan Housing Group Limited

 

In particular, the pre-merger group had entered into obligations with non-regulated members of the group putting social housing at risk, but lacked effective mechanisms to identify and manage the exposures.

 

  1. Robust Challenge

 

Central to the relationship between the executive and the board is the willingness of boards to provide robust challenge.

 

This is referenced above in the context of chief executives’ severance packages, however this is not the only circumstance in which boards must be robust in challenging the ambitions of the executive.

 

 

 

Broadacres HA Ltd

The regulator lacks assurance that the BHA board has managed its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight in relation to the management of its commercial activities and associated investments. These included insufficient robust, independent challenge by the BHA board,

The crystallisation of the risk exposure BHA faces as a result of its continued investment in its commercial subsidiaries is evidence that the board has failed to maintain the tight control required to manage them effectively

February 2017

 

 

Luminus Group Ltd

Material weaknesses in the information and material presented to the board have not been effectively challenged. The board does not systematically follow up progress with known control weaknesses identified through recommendations from internal audit. The board does not receive sufficiently detailed information to allow it to effectively monitor and make decisions on the investment and has not effectively challenged that situation.

March 2017

 

Manningham HA

The regulator lacks assurance that there is effective leadership or strategic direction and that the Board is maintaining effective oversight and control of MHA and its activities. The Board has failed to ensure there is sufficient resource to effectively manage its key risks and deliver strategic priorities which include determining the organisation’s future, organisational capacity and the impact of welfare reform changes.

It has not acted appropriately on warnings from its external auditor and has failed to ensure appropriate resources are in place to implement significant audit recommendations. It has not been able to assure the regulator that it understands adequately the risks it faces or their potential cumulative impacts on the business. It does not have adequately defined trigger points or potential mitigating actions in place.

February 2017

 

 

  1. Accurate Information

 

To provide robust challenge, boards need to ensure they have access to adequate and accurate information. It is not sufficient to rely on the executive to provide the information necessary, as the examples below demonstrate that they do not always succeed in doing so.

Luminus Group Ltd

An internal audit on gas found that the board had been given inadequate information. The board does not receive sufficiently detailed information to allow it to effectively monitor and make decisions on the investment and has not effectively challenged that situation

March 2017

 

Manningham HA

The Board has been hindered in its ability to take effective decisions by basic weaknesses in the information and material presented to it

February 2017

 

Broadacres HA Ltd

…poor quality operational information to the BHA board hampering its ability to make effective decisions

February 2017

 

 

Cosmopolitan Housing Group Limited

 

The quality of reporting to board was inadequate.

The quality of information reported to board in support of decision-making has been poor.

Officers failed to bring to the members’ attention the increasing pressures on liquidity until a point where the business was reliant on an overdraft that it was at risk of breaching. Cash flow forecasts were inconsistent, sometimes incomplete or inaccurate and failed to highlight material changes.

 

 

Shepherds Bush HA

 

…the quality of information provided to the board needs to improve to enable informed, timely decision making. In particular stress testing reporting which was limited to a small number of risks and one multi-variate scenario. The impact on covenants was not clearly articulated, leading to a lack of clearly linked and appropriate mitigation strategies.

 

April 2016

 

 

  1. 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.

  1. 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

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