THE
HOUSING
CORPORATION'S
OVERSIGHT
The Corporation's oversight of Focus
18. The Corporation regulates housing associations
to ensure their effectiveness in providing social housing and
to safeguard the interests of taxpayers and tenants. It has powers
to register and de-register housing associations, to draft statutory
guidance and regulations on key areas of landlords' activities,
to scrutinise information returns and accounts, and to supervise
landlords whose performance is unsatisfactory, including intervening
in cases of mismanagement or misconduct. At the time of the corruption
at Focus the Corporation's regulatory system had three elements:
performance standards setting out its expectations of landlords;
cyclical review visits, and from 1994, desk reviews, to assess
landlords' performance; and taking or requiring remedial action
when necessary.[14]
19. The Housing Corporation made performance review
visits to Focus in 1992, 1993 and 1995. In 1994 it undertook a
desk review of performance and carried out two audits of a sample
of Focus's housing developments. The Corporation assessed Focus's
performance as satisfactory until its review in 1995 and, while
it identified concerns with some aspects of Focus's development
activity, it failed to identify the lax management culture in
Focus's property services department and hence the scope for impropriety.[15]
20. The Corporation conceded that there were deficiencies
in its regulatory system at the time. The emphasis was on box
ticking and double-checking, rather than on standing back and
looking at the whole culture of an organisation. In the early
1990s the regulatory system was adjusting to a recent Housing
Act and a new system of finances for housing associations. Additionally,
Focus had recently been formed by merging three previous associations,
and was in a period of change.[16]
21. Focus had been well regarded, developing properties
and housing people, and its finances had been in good shape. However,
the Corporation acknowledged that if the procedural flaws which
it had reported to Focus in 1992 had been acted on, and if the
Corporation had pursued these in its 1993 follow-up visit, the
scope for corruption would have been reduced.[17]
22. None of the allegations or suspicions received
by Focus before November 1995 (Figure 1) were reported to
the Corporation. However, the Corporation had received two other
indications of impropriety. In November 1993 the Chief District
Valuer of the Inland Revenue's Valuation Office Agency told the
Regional Director of the Corporation's West Midlands office that
certain housing associations in the West Midlands were regularly
buying land and property at inflated prices from the same vendors.
Because of taxpayer confidentiality requirements, however, the
District Valuer could not give the Corporation information that
would have allowed it to identify the landlords or vendors concerned.
In June 1994 an officer at the Corporation's West Midland office
heard rumours that Hartshorn may have had an improper financial
relationship with a contractor and a structural engineer. The
allegation was reported orally to Focus's Chief Executive but
the Association was not informed in writing nor was it asked to
investigate the allegations. Nor was the Association told that
Hartshorn had left a previous association under suspicion of similar
impropriety.[18]
23. The Corporation agreed that the allegations had
not been followed up properly at headquarters and that they should
have been reported in writing to Focus. The allegation made in
1994 proved to be untrue, and actual collusive corruption was
very difficult to trace. However, the Corporation now recognised
that a much more rigorous examination of the allegations should
have been made at the time.[19]
24. When, in November 1995, Focus's Chief Executive
told the Corporation about the allegations he had received, the
Corporation immediately suspended funding of Focus, convened frequent
meetings with Focus's senior staff to monitor progress and the
investigations, nominated two members for appointment to Focus's
Management Committee and imposed conditions on Focus before approving
any further funding. In June 1996 the Corporation resumed funding
for Focus, having satisfied itself that proper internal controls
were being operated, and in January 1998 the Corporation removed
Focus from its supervision list following satisfactory performance
reviews in January and November 1997.[20]
The Corporation's oversight more generally
25. In their 20th Report of 1993-94 (HC204)
our predecessors identified the need for the Corporation to improve
its oversight of housing associations. The Corporation noted that
since the early 1990s it had increased its focus on housing associations
which presented the greatest risk, and sought assurances about
associations' internal controls, including the presence of a strong
internal audit function with a direct line to the Board. The Corporation
makes an initial assessment of performance by reviewing the annual
regulatory returns and other data required to be submitted by
housing associations. It uses this to inform decisions about investigatory
visits. Additionally the Corporation carries out validation visits
to check on the accuracy of data supplied. For large and medium
sized housing associations these will be at least every 3 years.[21]
26. The Corporation also considered how the organisation
operated as a whole, the relationship between the management and
the Board, the nature of reporting to the Board, and the frequency
and content of those reports. These changes had culminated in
1998 in a system called lead regulation, in which specialist staff
within the Corporation developed a closer knowledge of the work
of particular housing associations.[22]
27. On the question of why it had taken until 1998
to respond to recommendations made by our predecessors in 1994,
the Corporation acknowledged that its actions might have been
faster but claimed that it had to consult widely with stakeholders
on changes in regulation. It had also drawn on findings from several
internal reviews and the Focus case. The thrust of the changes
in the last five to six years had been to improve housing associations'
internal controls, and to obtain assurance that boards of management
were in charge of their affairs.[23]
Conclusions
28. Acknowledged weaknesses in the Housing Corporation's
oversight of Focus in the period from 1991 to 1995 allowed the
corruption to go undetected. Regulatory procedures failed to recognise
the lax management culture and poor standards of internal control
at Focus, nor did the Corporation ascertain whether corrective
action had been taken by Focus to address the procedural weaknesses
which regulatory supervision had identified. The Corporation took
appropriate action to supervise Focus closely once the corruption
was discovered, but too late, leaving Focus's tenants to bear
the losses.
29. The Corporation's actions fell below the standards
expected of a regulator in other respects. It handled allegations
of impropriety received in 1993 and 1994 in an unsystematic and
informal way; nor did it inform Focus that Hartshorn had left
a previous association under suspicion of similar impropriety.
The Corporation should provide its staff with clear guidance on
the action to be taken when allegations of impropriety are received,
and ensure that all allegations are properly investigated.
30. The Corporation has revised its regulatory arrangements
to improve its review of the standards of management and governance
within housing associations. The Corporation should monitor closely
trends in these standards and in levels of reported impropriety
at housing associations, and review its arrangements periodically
in the light of this monitoring.
14 C&AG's Report, paras 1.10 and 1.12 Back
15 ibid,
para 2.6 Back
16 Evidence,
Qs 2, 20 Back
17 Evidence,
Qs 74-75 Back
18 C&AG's
Report, paras 2.7 and 2.8 Back
19 Evidence,
Qs 3-4, 53 Back
20 C&AG's
Report, paras 2.9-2.12, Evidence, Qs 162-163, 172-173, Evidence,
Appendix 1, p19 (PAC/296) on Q173 Back
21 Evidence,
Qs 16, 135, 154-156, Evidence, Appendix 1, pp 18-19 (PAC/296)
on Qs 154-158 Back
22 Evidence,
Qs 16, 76, 135 Back
23 Evidence,
Qs 76, 123, 142-148 Back
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