Examination of Witnesses (Questions 1
WEDNESDAY 2 MAY 2001
1. This afternoon we are considering the Comptroller
and Auditor General's Report on the Housing Corporation's regulation
of housing associations' management of financial risk. Could I
first invite you, Dr Perry, to introduce your colleague.
(Dr Perry) Thank you, Chairman. I have with me Mrs
Clare Miller, who is the Director of Regulation Policy at the
2. Thank you for that. Have either of you been
before us before?
(Dr Perry) I came for the Report which you published
3. Of course so you will remember in any event
that I try to give you an indication of which paragraphs we are
talking about to give you some steer. The first question is about
paragraph 2.15, which tells us that the Corporation is replacing
its performance standards, which will be one of the corner-stones
of the fresh regulation, with a new Regulatory Code which is more
general, if I read it correctly. How will you ensure that the
high standards of probity and governance of financial management
expected in the sector will not be diminished?
(Dr Perry) The system that we have used up till now
has 69 performance standards which are very prescriptive about
the processes which housing associations need to use in order
to attain and keep these high standards. The Regulatory Code will
focus more on outcomes, but the way in which those outcomes are
reached is essentially a matter for the internal decision of RSLs.
However, our league regulators and our league regulation system
will need to monitor the processes that are used in order to obtain
the outcomes. In our belief it is a low-risk transition that we
4. We will come to individual risks later. A
simple question, requiring a yes or no answer; did you consult
the NAO in drawing up the new code?
(Dr Perry) We are not yet at the stage of formal consultation.
We have issued a draft paper for general information and comment
and I believe at least one copy is in the hands of the NAO. Our
board at its meeting last week approved a paper for formal consultation
and clearly the NAO is one of the bodies with whom we automatically
5. My next question relates to figure 6 which
shows year-by-year the decline in the number of large RSLshousing
associations for those of us who are a bit olderpassing
the Corporation's financial ratios. What are you doing in response
to this deteriorating performance?
(Dr Perry) We do not necessarily agree, Chairman,
that it is a deteriorating performance. The sector is faced by
financial challenges and the Government itself in its policy does
seek to make assets work harder within RSLs and housing associations.
The 85 per cent figure for passing is actually a trip wire which
is conditioned by our workload requirements rather than being
an absolute judgment of how well they are doing. Where associations
fall below individual ratios which talk about short-term solvency
then that triggers some investigatory action by league regulators
and quite intensive discussions often with the associations.
6. If I were feeling paranoid you have given
one the suspicion that when the hurdle gets hard to cross you
want to lower it, but we will come back to that and let others
perhaps pursue that individually. Paragraph 2.20 is my next item.
That points out that many institutions that lend to RSLs are worried
that the RSLs are diversifying into new business activities without
adequate preparation. What assurance can you give the Committee
that RSLs are capable of managing the risk that comes with diversification,
particularly the private finance deals which fund such activities,
and that your staff, in turn, have the necessary skills to understand
and regulate the management of those risks?
(Dr Perry) The question of diversification, as you
are well aware from the Report, is quite controversial. We have
put trigger points for RSLs to tell us when they are diversifying.
For the sector as a whole we think there is a very low risk in
diversification because the financial capacity is strong and the
sorts of activities into which diversification is taking place
are consistent with the aims and objectives of RSLs. Each individual
housing association has to weigh the risk themselves, discuss
that with the lead regulator, and it is difficult to predict in
advance whether an individual RSL is capable of taking on that
risk. That is something that lenders have to consider and something
that the regulator has to consider.
7. Let me say to you that I had the misfortune
of living through that period of British business activity when
diversification was all the rage and nobody then thought it was
very risky and a large number of companies went bankrupt. I am
quite concerned and, if nobody else picks this up, I may come
back to this at the end and to the question of how you ensure
that public money is not used to subsidise the losses of poor
commercial performance in diversifying activity. I will leave
that one and somebody else may pick that up before I come back.
My next question relates to 3.12 and 3.13. RSLs' risk appraisals
have an important part to play in your new regulatory approach.
Those paragraphs tell us that RSLs' risk appraisals are not always
of very good quality nor, indeed, are they used effectively. How
do you ensure that the RSLs have identified the key financial
risks and adopted appropriate strategies for managing them?
(Dr Perry) The Report gives information on a survey
which the NAO did in 1999, which was very shortly after we had
introduced the mandatory requirement in May 1998 for RSLs to do
risk appraisals. It is probably not surprising that the first
round of them might be of variable quality and there was a variation,
as it says in the Report, in the number of risks that each of
them identified. Since then we have worked very closely with the
sector on tightening up the guidance. For example, one might hold
up a very large document which we published in December 2000 on
risk management for RSLs and the new lead financial regulation
system will pay a lot of attention to the quality of risk appraisals.
As you rightly say, it is key to whether the new system works
8. You will forgive the Committee if it is a
little less trusting about some of this given its previous experience,
but again others may want to pursue that. Related to that, paragraph
3.16, the Corporation has gathered information on various aspects
of the assessment of financial governance and management. That
paragraph points out that you have not yet compiled a systematic
or comprehensive appraisal of financial risk in this sector. What
action are you taking to compile such appraisals?
(Dr Perry) We think that is a very helpful suggestion
and we are going to work on it very strongly. The Report does
point out in that paragraph that we have already assembled a fair
amount of information. It is fair to say that the size of the
sector has grown very rapidly in the last few years, principally
through stock transfer. The macro-economic importance of the sector
is now getting to the stage where it would be helpful to us to
produce a report on overall financial health and to lay that before
9. Do you maintain any sort of risk model of
(Dr Perry) For the sector as a whole? No, we do not,
10. Do you not think you should?
(Dr Perry) It forms part of the work that we are doing.
As the sector becomes larger and more significant, I think we
ought to do that.
11. I would hope that it is an urgent part of
your work. My next question relates to paragraphs 4.8 and 4.18,
which point out that your financial ratios need to be improved,
particularly for the RSLs created under the Large Scale Voluntary
Transfer programme (the LSVT) where your existing ratios are inappropriate.
What are you doing to improve these financial ratios to assure
that they are robust and relevant to the whole of the sector?
(Dr Perry) With your permission could I invite Mrs
Miller to talk in detail about the ratios. So far as the LSVTs
are concerned, we acknowledge quite freely that those ratios were
not designed for the particular financial circumstance of LSVTs.
Given that most of the larger ones are relatively recent and their
business plans are very recentand we think it is appropriate
to monitor their performance against their business plan as that
is what their lenders will be doing as wellwe have commissioned
consultants to work on longer-term ratios for LSVTs which will
become important as we have a number of years of track record.
For the ratios as a whole they are intended to be indicators of
short-term solvency rather than long-term structure and stability.
With your permission, Mrs Miller can answer detailed questions
(Mrs Miller) We found the Standards and Poors recommendations
very interesting and very useful and as a result of that we have
introduced some modifications to the ratios but, as Dr Perry referred
to earlier we are commissioning Robson Rhodes to undertake a thorough
review of all our ratios with a view to looking specifically at
12. When will we get a result from that?
(Mrs Miller) The work has already been commissioned
so we would be hopeful that we would get a result this year.
13. This year? By December, you say?
(Mrs Miller) Yes.
14. I see. Okay, let me press on. Your staff
use the financial ratiosthis is paragraph 4.16to
generate initial assessments of the RSLs' finances and that paragraph
points out that it is very common for regulatory staff to reassess
the RSLs, moving them from "observation" or "supervision"
status to "satisfactory" status. The extent of re-assessment
varies between regional offices. This is what I had in mind when
I said if they do not pass the hurdle you just lower the hurdle.
Why are so many RSLs re-assessed as satisfactory and why are there
such wide variations across regional offices?
(Dr Perry) If I could take the latter question first.
I do not think that it is acceptable for there to be wide variations
between regional offices unless they can be explained in terms
of the performance of the RSLs, which is why there has been a
quality assurance programme in place for two or three years now,
and the system we are moving towards will ensure much greater
consistency between regional offices. I would not care to say
that the variations would be acceptable had they been allowed
to continue. So far as the reasons are concerned as to why assessments
are made, again the ratios are intended to be trip wires, triggers,
for the regulatory staff to look at what the ratios throw up,
and one of the main points of being a regulator is to try and
assess the materiality of any performance figure which goes below
a threshold and then to assess what a proportionate response might
be. Effectively, the staff are applying their regulatory judgment
to what the computer has thrown up.
15. Implicitly, if you are accepting that some
regions are doing poorly by comparison to others, then some regions'
judgment are not very good. Is that what you are effectively saying?
(Dr Perry) That could be the case. Our quality assurance
work which has gone and looked at a number of the re-assessments
indicates that only in a small number of cases would they want
to come to a different judgment. It is a point thrown up in the
C&AG's Report which we do take seriously and which we hope
will be eliminated by the new regulatory training system that
we have drawn up.
16. Okay. My last question before I widen it
out relates to paragraph 5.4. What that tells us is that some
supervision cases run on for quite a long time. Some stay under
supervision for more than four years. Given these are cases where,
by definition, there are serious causes for concern, what are
you doing to ensure that they are resolved more quickly?
(Dr Perry) The supervision cases are not always to
do with financial issues. We can say that where serious financial
issues are concerned then the resolution is reached quite quickly
because if it were not reached then the organisation might go
under. The longer running cases tend to be ones where there are
governance issues, constitutional issues which sometimes need
quite a lot of unwinding before they can be resolved.
17. Give us an example.
(Dr Perry) There is one that has actually been the
subject of a statutory inquiry by the Corporationand we
only just received the report before the board last weekwhich
is a co-operative in East London where there have been problems
about the way in which the organisation is run, their standing
orders, their ability to retain governing bodies, which have nothing
do with financial probity, but have really given us quite serious
grounds for concern.
Chairman: Yes, I see. Others may want to come
back to that. Let us widen it out. Mr Gerry Steinberg?
18. On page 22, paragraph 3.5, it says that
in 1993 only 50 per cent of RSLs submitted their financial accounts
on time and it was recommended that firm action should be taken
against those who did not. That was way back in 1993. Six years
later we are told that 33 per cent still did not submit their
accounts within six months of the required date and we are told
that it takes up to one year to get in 98 per cent of the accounts.
Why has there not been a better improvement than that?
(Dr Perry) There are a number of reasons for that.
In line with the Committee's recommendations in 1993 there was
greater effort on the part of the Corporation to use enforcement
action, for example, to go to court to seek prosecutions. A number
of these were successful but the courts in general did not take
kindly to this kind of action. They regarded it as bureaucratic
bullying on the part of the Corporation because the defaulters,
if you can call them that, are normally very small associations,
very often they have never had a penny of public funds and they
are run by volunteers who sometimes struggle to put in the accounts.
The action that we are taking at the moment is to try and see
whether we can assist those small associations to bring their
accounts in on time. We are setting up small teams of people in
each of our new offices to assist small associations. For some
of them we may suggest that they would be better off de-registering.
The main point of being a registered social landlord is to be
able to claim Government money if you want to develop. If they
are a non-developing association sometimes they do not need to
be registered, so we are also doing some more work on de-registration.
19. That is all well and good and I take the
point that you are making about the ones that do not have public
money, but how can you assess the financial performance of an
RSL if you do not have their accounts?
(Dr Perry) For all of the associations' financial
performance that we do need to assess, that is the 600 largest,
unless Mrs Miller corrects me, we get the majority of their accounts
in on time.