Learning from Regulatory Downgrades 2019/20
Learning from Regulatory Downgrades
This is the seventh in a series of Learning from Regulatory Downgrades that I have published on an annual basis.The Regulator has issued over 135 governance downgrades for housing associations over the past 7 years. This report seeks to explore why those downgrades have happened and the common threads that Board Members, councillors, residents and executives should be looking to learn from.
About 15 years ago I read Julian Ashby’s seminal “Learning from Problem Cases” – a study of why housing associations went into supervision. What I learned was the importance of sound governance both in housing associations and for housing regulation. When I became a senior housing regulator I started any speech on regulation with a clear recognition that good governance was key to tenant involvement and services for which I was responsible.
This report details the areas that the Regulator has highlighted in the Regulatory Judgments (RJs), backed up by direct quotations from those named RJ reports along with some from Regulatory Notices where they underpin other issues in the Standards. I have both updated and trimmed the number of quotes (otherwise this report would become unwieldy) but the earlier versions remain available for those who like fuller detail. Alternatively you can read all the downgrades directly on the Regulators website.
1st April 2020
Commentary on 2019/20
Last year I commented on the emergence of lease based providers in my report. These have continued to be a discomforting feature of this years report including one G4, who entered the Regulators Insolvency Process, and one G3 rating as well as six regulatory notices, which would have almost certainly resulted in similar scores if they had not been below 1,000 properties. One provider even got two regulatory notices. The Regulator’s Sector Risk Profile (Page 26) briefly covers this along with their comprehensive 2018 addendum.
One prediction I got right in last years report was the growing attention to Local Authorities by the Regulator. Seven Councils were issued with Regulatory Notices concerning Health and Safety, including four in one ALMO. I suspect the eventual wider coverage of Councils by the Regulator will undercover more examples of non-compliance. In passing I noticed that the ‘gaps’ in terms of health and safety, which had originally majored on gas safety, have now included all the “Big 5” plus lift safety as well. This report now features all health and safety issues together under one heading.
One unwelcome trend is that some providers fail to be sufficiently transparent with the Regulator.
Otherwise the key five topics remain, often interlinked. Risk, management internal controls and stress testing and financial reporting are core issues for board governance. Boards need to continue to be alert on all and ensure that they apply critical thought to how they ensure their approach is, and is seen, to be robust.
Other issues raised include rents (where the new Rent Standard will be more exacting), fraud, probity, asset management, reporting of KPIs, Stock condition survey and performance. The raising of asset management is interesting and potentially foreshadows the evolving role of the Regulator with the (presumed) publication of the Social Housing White Paper.
Table of Regulatory Downgrades for 2019/20
|Board Governance and systems||Risk management||Internal Controls||Stress Testing||Transparency||Health and Safety||Financial Reporting||Other|
|Westmoreland Supported Housing||X||Lease based provider
Entered Regulators insolvency process
|Cheshire Peaks and Plains||X||X||X||X||X|
|New Roots||X||X||X||X||Lease based provider
|Your Housing Group||X||X||Asset Management
Value for Money
|Swan Housing||X||X||X||Value for Money|
|YMCA St Pauls||X||X||X|
|Lincolnshire Housing Partnership||X||X||X|
|Framework Housing||X||KPI reporting
Stock Condition survey
|For Housing||Interim judgment
Grading Under Review
Table of Regulatory Notices for 2019/20
|Health and Safety||Lease based provider
|Larch HA||Under 1,000 – issues with:
· Business planning,
· Risk management,
· Control framework,
|LB Lambeth||Fire Safety
|Runnymede Council||Fire Safety
|Green Park Property Management||Under 1,000 – issues with:
· Business Planning
· Risk Management
· Internal Controls
· Only one Board Member
· Inquorate Board
· No basic governance procedures
· Tenant safety
· Tenant consultation and support following closure of leases
· No due diligence on new leases
· Conflicts of interest
|Expectations UK||Under 1,000 – issues with:
· Risk Management
· Internal Controls
· Charity Commission Official Warning re Chief Executive (and former founder and Chair)
· Significant conflicts of interest
· Poor engagement and lack of transparency with the Regulator
Folkestone and Hythe Council
|East Kent ALMO covering tenants from all four councils. Board dismissed and replaced by four Chief Executives of Councils.|
|Bespoke Supportive Tenancies||Two Regulatory Notices
Under 1,000 – issues with:
· Risk Management
· Financial Planning
· Stress Testing
· Failure to comply with articles
· Gas safety
· Fire Safety
· Water Safety
· Electrical safety
|Brent Community Housing||Under 1,000:
Failure to submit accounts to regulator within 6 months
|Wrott and Hill Charity||Under 1,000:
Failure to submit accounts to regulator within 6 months
|Gateshead Council||Fire Safety
|Encircle Housing||Under 1,000. Issues with:
· Risk Management
· Control Framework
· Business Planning
· Conflicts of interest
· Health and safety
Areas covered by Regulatory Downgrades
|A. Regulation and Boards||1.||Keep up to Date|
|2.||Tell the Regulator|
|3.||Hit HCA Deadlines|
|4.||The Rent Standard|
|5.||Disposal of tenanted housing|
|B. Consumer Regulation||6.||Health and Safety|
|C. Hubris – The Threat to Good Governance||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|
- 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.
Yorkshire Housing Group
As a result of YHG’s approach to business planning it has not been clear to the regulator that the group’s regulatory returns fully reflect its growth plans and stock investment requirements. YHG has not met the regulator’s transparency requirements in this respect.
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.
- The Rent Standard
The rent standard has been recently changed from today and providers will need to proactively comply with it.
We are continuing to engage with PHG to ensure that it has sufficient assurance to evidence that it meets the legal requirements relating to rents in its specialised supported housing stock on a consistent basis. PHG is undertaking the work to achieve this and is keeping the RSH informed of the changes it is making.
- 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.
Green Park Property Management
A number of Green Park’s leases have been terminated by the property owners, and during this period, Green Park failed to carry out adequate consultation and has not provided appropriate support to its tenants. In many cases, the outcome is that those Green Park tenants have become a tenant of a landlord who is not a registered provider.
Regulatory Notice October 2019
Our judgement is that Moat has not adequately reflected the changed operating environment, arising from deregulation measures which removed the regulator’s powers to give consents for disposals, in its decision making. There was insufficient board oversight of the disposal. As a result, the board was unable to assure itself that the disposal met legal and regulatory requirements. Moat’s assurance that the disposal met its charitable objectives was inadequate. Although legal advice was taken in respect of the transaction, Moat did not obtain specific legal advice regarding the charitable considerations arising from the disposal. Due diligence of the proposed purchaser was insufficiently robust to demonstrate accountability to tenants and obligations to protect social housing assets. The disposal decision was delegated solely on financial criteria. No objective report covering the wider implications of the sale was presented to decision makers to provide assurance that the disposal met Moat’s charitable objectives and other regulatory expectations.
- Consumer Standards
- Health and Safety
While consumer regulation is not actively regulated, it undergoes a ‘serious detriment’ test. Nearly all of the breaches of consumer standards feature health and safety. This also applies to Councils who are not subject to Governance ratings but can be issued with Regulatory Notices. It is worth noting that the Regulator can see 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.
The board lacks sufficient oversight of landlord health and safety compliance with weaknesses in systems, processes and data.
Whilst Inquilab is taking action to address the issues, we have concluded that the number of weaknesses on health and safety and the length of time they have been present indicate improvement is required in the governance of the organisation. The board needs to demonstrate that it has embedded improvements in its health and safety control framework and effective board control.
PHG has self-reported a number of issues concerning health and safety to the regulator. Engagement indicates that PHG has been working to rectify failings. However, following an independent review, it is clear that because of data issues, PHG has not had adequate assurance on health and safety compliance. The board needs to demonstrate that improvements in its health and safety control and assurance processes have resulted in effective board control of this key risk. March 2020
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.
Beyond Housing (although situation arose from pre-merger self report by Yorkshire Coastal Housing)
Prior to the merger, YCH made a self-referral to the regulator in relation to fire safety. It told us that a large number of fire risk assessments (FRAs) had passed their review date, and that a small number of properties did not have an FRA in place. The majority of these properties had been overdue for around eight months, but a small number had been overdue for more than a year. The issue affected hundreds of YCH tenants. YCH also told us that it had concerns about the quality of the FRAs carried out and was concerned that all hazards had not been fully identified, and that there was limited evidence available to demonstrate that actions identified had been completed.
Lincolnshire Housing Partnership
With regard to electrical testing, the regulator concluded that LHP had failed to have in place effective systems and an effective programme of planned work to identify electrical safety risks and so had breached the Home standard. A previous external assessment of a sample of electrical inspections for Boston Mayflower properties found a high proportion of the sample failed quality requirements. Following the merger, LHP commissioned a comprehensive review which raised concerns about the lack of valid or in-date certificates for the vast majority of Boston Mayflower properties. Quality control checks found a number of errors in both the categorisation of works, and completion of certificates.
Cheshire Peaks and Plains
Further to this there were a significant number of actions identified during domestic asbestos surveys where CPPHT is unable to evidence that the works required to remove the risk to tenants have been completed.
Regulatory Notice December 2019
East Kent Housing ALMO (issued to four Councils)
For lift safety, faults were not rectified for up to 18 months. The audit noted the lifts were still in use during this time.
Regulatory Notice September 2019
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.
Circle Anglia Limited
In implementing its plan to rationalise suppliers and create fewer, larger contracts for responsive repairs and planned maintenance, Circle has failed to control delivery of a core service and respond effectively to serious underperformance. This is consistent with a systemic problem in the organisation’s risk management and internal controls.
For example, in relation to Circle 33’s 8,000 homes, over a period of three months Circle reported that less than 20% of urgent and emergency repairs were completed on time and elsewhere less than 50%. By way of further example, referrals received by the regulator, including information about a significant number of outstanding statutory notices relating to disrepair, provided evidence that for over a year tenants, including vulnerable tenants, had experienced significant difficulties in getting essential repairs done, either on time or at all.
Clarion Group (which now includes Circle)
During early 2016 the regulator had received assurance that the performance of Circle’s emergency and urgent repairs service in east London, which had been the subject of a regulatory notice from April 2015, had improved significantly and was then at an adequate level. The regulator therefore removed the regulatory notice.
The referrals received after that point have related to a broad range of issues, including: performance of heating and hot water repairs services, more general repairs and maintenance including, in some cases, services provided to vulnerable and potentially vulnerable tenants, difficulties in contacting Circle to raise issues and complaints and perceived poor responses by Circle to complaints, leading to a very large number of complaints being outstanding for long periods of time.
This followed Circle merging its customer contact operation into a single call centre and in parallel implementing a new customer relationship management IT system in June 2016. These referrals include a large number of what the regulator terms “statutory referrals” from councillors and MPs, as well as complaints from individual tenants. Collectively, they relate to hundreds of individual repairs issues raised by tenants, and hundreds of complaints about Circle’s handling of repairs and accessing Circle’s services. A high proportion of those complaints have been unresolved for long periods of time.
- Tenancy Standard
Showing the need to comply with tenancy law for all tenants including evictions and licencees.
WM had failed to ensure that the implementation of its eviction processes provided licensees at this scheme with the level of protection required by law. WM Housing had failed to ensure that the implementation of its eviction processes provided licencees at this scheme with the level of protection required in law. That meant that all licencees at this scheme may have been at risk of an unlawful eviction. WM Housing has provided assurance that the issues identified only relate to this one scheme, but the regulator also noted that this issued had continued for up to two years. September and October 2017
Westmoreland Supported Housing
In addition, the board has failed to ensure its tenancy management is effective prompting intervention from a local authority and the regulator after Westmoreland issued eviction notices to a number of its tenants to enable it to hand back properties rather than carrying out a more managed process. The way the board handled this situation and the subsequent sub-optimal outcome that resulted is a significant contributory factor in the regulator’s conclusion that Westmoreland’s governance arrangements are not effective. November 2018
- Hubris – the Threat to Good Governance
Governance remains key to the effective running of housing associations. However, for some landlords, rules are ‘meant to be broken’ – or ignored. Often they experience other difficulties as hubris clouds their vision of what their role should be.
- Comply and Publish (Non)Compliance with the Code of Governance
Housing associations are able to choose an appropriate Code of Governance. Having chosen their preferred code, there is then a requirement to ‘comply or explain’. Some associations have not explained at all, others have not given a satisfactory explanation for their non-compliance. The National Housing Federation updated their Code of Governance in 2015 and this now provides a stiffer test for compliance in line with issues raised in previous versions of this report. They are also currently reviewing the Code partially in view of their Together with Tenants initiative.
Luminus Group Ltd
Luminus is also unable to substantiate that it is compliant with its chosen Code of Governance in relation to the adequacy of its delegations framework and board recruitment.
To support continued effective delivery, the board needs to strengthen its capacity to review and challenge its own governance arrangements. It needs to ensure that it reviews its governance performance in a rigorous and evidence-based way. Recent reviews of compliance with its code of governance have not been thorough and the board has not explicitly confirmed its compliance.
- Nine Years Maximum
Terms of office are a maximum of 9 years, however the ‘9-year rule’ is not an absolute rule and there may be reasons why, exceptionally, some board membership might exceed that period. However this must be discussed with the Regulator and put in the context of a sensible succession strategy. In most cases it isn’t adequate to cite “continuity” as a reason for non-compliance, as a joint letter to Chief Executives from the HCA and the NHF in February 2014 made clear. The Regulator will engage with landlords and agree sensible ways forward.
Yet some landlords didn’t agree sensible ways forward and in some cases had members with 20 or even 40 years board membership. What was revealing was that excessive length of membership resulted in poorer governance and overly close relationships between board and staff.
Tuntum Housing Association Limited
Tuntum does not comply with the provisions of its chosen code of governance in relation to maximum terms of office for board members. The code specifies maximum terms of nine years but Tuntum has made rule changes which extend this to a 12-year maximum. The association currently lacks clear succession plans for the chair and other board members. In addition, the criteria used by the board for extending terms of office should be clearly specified.
- Board Composition and Skills
As housing associations diversify in their operations, boards face a growing range of issues on which they need expertise. Examples include development, marketing, finance, commercial activity and treasury management. You need to ensure the board covers all the necessary bases, and not be afraid of change, including change in your governing documents, to ensure this happens. The Board should also ensure conflicts of interest are identified and managed appropriately.
Sustain’s board membership did not previously include any independent non-executive members and the provider was not compliant with its chosen code of governance. Inherent conflicts of interest had arisen as a result of related party transactions to companies owned by Sustain’s executives.
- Annual Appraisals
Having got your board in place there should be a regular mechanism for appraising their effectiveness and identifying areas for personal development and any gaps in board skills.
Regular formal board and executive appraisals have not been carried out in recent years, although these have recently been completed with external support. The IDA identified that board skills assessment; succession planning and some aspects of reporting arrangements also require improvement.
- Board size
Less is more. Make sure your board is 12 or less. There’s a strong body of research published showing that boards that are too big are less effective. It can be hard for larger boards to admit that they are too big and, even harder, that some board members will have to go. The Regulator will want to know if an oversize board has a plan to achieve compliance, and within a reasonable timeframe.
Bournemouth Churches Housing Association Limited
The size of BCHA’s board exceeds the maximum specified in its code of governance. It has no plans to achieve compliance and the regulator does not have assurance that it has carried out a robust assessment which adequately supports any case for non-compliance.
- Review Your Governance
There should be a regular cycle of reviewing the board and its governance arrangements to ensure that they remain fit for purpose. Having done the review it also helps to take it seriously and implement the recommendations. And, as with many of the matters included in this report, it can be useful to commission (and take note of) external advice.
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. February 2018
Investigations undertaken by the regulator obtained inadequate assurance over Trinity’s long term viability, the effectiveness of its risk management and internal controls and that the board has managed Trinity’s affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight.
The Trinity board has failed to effectively manage the risks the organisation faces and has not ensured there is access to sufficient liquidity at all times. This has resulted in it breaching certain lease terms due to its inability to make payments as they fell due. In addition cash flow projections presented to the regulator demonstrated it had not been able to secure access to sufficient liquidity to meet future lease payments.
The fact the board has failed to manage its significant risks, has ceded control to third parties and has allowed tenants to potentially be put at risk is a fundamental failure of governance. November 2018
- Risk, Internal Controls and Sound Financial Planning
Managing risk is now central to the work of landlords and core to the role of effective boards. Ensuring that there are effective internal controls in place safeguards staff, tenants and board members.
- Do Risk Properly
It is essential for the business to have a robust risk framework in place, monitored and used to drive mitigation and improvement. This includes when managing strategic change.
Cosmopolitan Regulatory Judgment
The group’s approach to risk was based on an over-simplification of presenting issues, coupled with too little scrutiny of new deals taking place after the merger. This, alongside an inadequate control environment, especially in relation to the development function, exposed the group to unacceptable levels of risk. In particular the board’s decision to fund its investment programme through a sale and leaseback arrangement was based upon a wholly inadequate analysis of risk and a rudimentary sensitivity analysis, coupled with a failure to consider alternative plans. ..the group failed to effectively manage the risks to delivery of its plans.
Inclusion Housing Community Interest Company
Inclusion has provided insufficient assurance that its current risk management and mitigating actions are commensurate with its risk profile. We lack assurance that steps within its control should risks crystallise would ensure its on-going financial viability and that social housing and tenants homes are protected over economic and policy cycles. February 2019
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.
Westmoreland Supported Housing
The Westmoreland board has not managed the risks to the business effectively and has been unable to provide the regulator with financial information that was based on appropriate and reasonable assumptions. It has provided insufficient evidence that it currently has a deliverable business plan. The organisation is also in a position where it is reliant on continued financial support from a third party while it attempts to restructure its business, to ensure its medium to long term viability. This is clearly not a desirable or sustainable position, nor one that meets the regulator’s standards.
- 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.
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 has become more important in these uncertain times and will be challenged by the Regulator.
On the basis of an IDA, we have concluded that Cornerstone needs to improve board oversight of its strategic financial risk management. In particular, we lack assurance that the board has used stress testing to fully inform its business planning and treasury management strategy. The multi-variant scenarios which Cornerstone has tested are not sufficiently severe and there is a lack of clarity in reporting as to the timing of potential covenant breaches. Whilst mitigations have been identified, these have not been modelled against the scenarios to test their effectiveness in avoiding a covenant breach. In addition, Cornerstone has not identified formal points at which management action would need to be triggered. Furthermore, it has not tested the potential impact of different scenarios on its cash position.
Swan needs to strengthen its stress testing by including a wider range of risks in the scenarios which it assesses. This would allow the board to improve its understanding of the potential impact of risks and would better inform its business planning, decision making and risk management. Further development of early warning triggers and mitigation strategies is also required to assist it in recognising and controlling the impact of risks.
We have concluded on the basis of the IDA that Connexus’s approach to stress testing is not fully developed. Stress testing has considered the key risks to which the provider is exposed, however it is only undertaken at a group level and fails to understand where entity risks may crystallise and impact on the wider group. There are also gaps in the testing of cash and security with insufficient assurance of board ownership and challenge. Clear early warning indicators are not in place or monitored by board, and further work is required on mitigation strategies.
- 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
Westmoreland Supported Housing
There are inherent conflicts of interest at board level. The chair of Westmoreland is employed in a senior role by the same third party that is providing the cash support, management services and sourcing properties as part of Westmoreland’s growth strategy. The board has yet to provide compelling evidence that appropriate probity policies and arrangements were in place to effectively manage these conflicts. November 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.
- Operation of the Board
As well as meeting basic rules on good governance, boards need to establish and maintain proper working relationships with staff, ensure meetings are well run and seek and take notice of external advice.
- Senior Executive Severance Pay
In a nutshell: Don’t give your departing chief executive or senior executive a big severance package (or allow it to happen).
Four landlords have been downgraded for such packages with substantial reputational damage both to them and the sector. Associations need to ensure their approaches are watertight. In particular, regularly review your employment policies and executive contracts well away from the emotion created by the departure of a hard working stalwart.
Evidence gathered by the regulator, following this self-referral, confirmed weaknesses in governance, and in particular in the effectiveness of Ongo Homes’ board oversight and risk management. Ongo Homes failed to be appropriately sighted on decisions taken by its unregistered parent and as a result did not ensure it was in a position to prevent key risks from materialising.
Although the decision making on this matter did not sit with Ongo Homes, there were opportunities for Ongo Homes’ board to identify and manage the risks for it associated with executive remuneration, including the potential for discretionary payments to be agreed. The controls and mechanisms in place to manage risks of this nature, which included the chair of Ongo Homes’ board being a member of the unregistered parent’s board, were not operated effectively by Ongo Homes.
As a result, Ongo Homes’ board has found itself liable for significant discretionary financial costs without visibility or effective input to the decision-making, and has failed to safeguard its reputation, and that of the sector.
During a significant period of restructuring the board exercised weak governance and internal control when agreeing executive contracts and severance payments to outgoing executives. In doing so, the board has failed to safeguard its reputation, and that of the sector.
- Clear Relationships
Be clear about the respective roles of board members and executives. You need to have a good working relationship based on those clearly defined roles, don’t delegate too much to staff and be particularly clear about roles where chief executives are also board members. It also means being precise about delegation to Board working groups and committees.
Equity Housing Group
There is a lack of clarity regarding the respective roles and responsibilities of the board and its committees. This has resulted in duplication, and also, in some instances, insufficient board attention on matters which have been over-delegated. It was not clear that the board had adequately addressed past weaknesses in establishing clear accountability throughout the structure.
We have concluded that the board’s strategic focus has been diminished due to its continued involvement in operational issues following the establishment of a new executive team. The division of responsibility between the executive and the board needs to be re-examined and firmly established.
- Take Expert Advice
There will be times when boards cannot have all the skills they need within the set of board members to provide adequate expertise and advice when considering courses of action. It is right to seek external advice in these situations and use that to support decision-making. It is also important that, having sought advice, boards should heed it and act accordingly.
Great Places Housing Group Limited
It did not always recognise the need to seek independent expert advice and did not always make the best use of advice it did receive
- Run Board Meetings and Processes Properly
Board meetings should be run properly – and minutes should be taken. This is a fundamental matter of record keeping.
Saffron Housing Trust Limited
The board of Saffron had been advised that defects in governance processes and a failure to comply with its rules meant that some board members had not been appointed properly. The failure had occurred over a period of several years. Significant decisions were made during this period involving third parties and funders and there was uncertainty about the validity of all the decisions that had been made at those meetings given some board meetings had been inquorate.
- Structures and Subsidiaries
It is essential to have a firm grip on complex structures and subsidiaries. Obviously this is driven, in part, by the Cosmopolitan experience but also by the increasingly diverse nature of the sector in setting up subsidiaries for tax efficiency and/or creating new lines of income. Boards should be aware that there are potential risks in complex structures and take account of the overall impact of that risk and potential impact on social housing run by the landlord. This includes clarity about apportionment of running costs.
Broadacres HA Ltd
Since its acquisition in 2012, the main commercial subsidiary’s financial performance has been poor. The BHA board has failed to effectively monitor the risks associated with this activity and there are inadequate mitigation strategies in place to manage them. Foreseeable risks have crystallised and the unregistered non-charitable subsidiaries are increasingly reliant on the continued support of the registered parent. As a result BHA is exposed to a combination of material losses, impairment and write offs. The structural arrangements in place, including intra-group lending and parental guarantees between group members, has resulted in BHA accepting the majority of the downside risk and its on-lent investment at risk has increased to £18m February 2017
NSAH (Alliance Homes)
Improvements are also required to the board’s oversight of its care and support activities. There is a lack of transparency in reporting to board on the overall financial performance of the loss-making care subsidiary and in-house support activities. Although this issue is not material to our financial viability judgement, we lack assurance on the true costs of providing these services, with no clear rationale for the level of overheads being recharged.
- Accurate Information
To provide robust challenge, boards need to ensure they have access to adequate and accurate information.
Swan needs to improve clarity of its reporting and information to ensure that its strategy, risks and performance are clearly understood, at the level required, by a range of stakeholders including the regulator. This would assist the board and its stakeholders in ensuring that organisational aims, objectives and intended outcomes for tenants are being delivered in an effective, transparent and accountable manner.
Cheshire Peaks and Plains
As a result of weaknesses in the provider’s financial reporting processes, CPPHT failed to identify that the formal consent of one of its lenders was required for the securitisation of a property to another body. CPPHT’s assets and liabilities register did not identify this non-financial covenant and consequently it did not fully understand its contractual arrangements and failed to have appropriate monitoring in place. CPPHT therefore did not seek consent as was required and as a result, breached this non-financial loan covenant. CPPHT was subsequently granted waiver letters from its funders but nevertheless, during this period, CPPHT failed to safeguard its social housing assets as the Governance and Financial Viability Standard requires. CPPHT only became aware of the covenant breach when it was alerted to it by the lender.
The IDA found weaknesses in elements of YHL’s financial reporting. YHL needs to make improvements to reporting on the financial performance, including liquidity, of its commercial subsidiary as well as on YHL’s overall development programme to allow the board to manage its affairs with greater diligence and foresight. This is particularly important due to the increased level of development and sales activity being undertaken in the group. YHL has started to make improvements to strengthen board oversight and control in these areas.
- 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
This is now included as a category for the first time. 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.
New Roots has experienced rapid growth in recent years. The model operated by New Roots means that, whilst it has landlord responsibility for its tenants, it enters into short-term leasing arrangements with a number of third parties for properties. These third parties then also deliver the landlord and management services on New Roots’ behalf under an agreement. Some of these third parties with whom New Roots enters into leasing and management arrangements have themselves leased the properties from a range of head landlords. Following an In-Depth Assessment (IDA) and subsequent investigations the regulator has found:
Significant weaknesses in New Root’s business planning framework
Inadequate risk management processes and internal controls
That the board have failed to manage their affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight.
Lack of assurance over probity arrangements and relationships with third party contractors
- Regulator’s Insolvency process
We also have the first entry in the Regulators Insolvency process, which automatically triggers a G4 rating.
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.