Memorandum by Julian Ashby of HACAS Chapman
Hendy (THC 07)
FOCUS OF
THE SUBMISSION
1. The Housing Corporation was given a wide
regulatory role in relation to the housing association sector
when its powers and remit were extended by the 1974 Housing Act.
This role has been reconfirmed in successive Housing Acts that
have covered its overall responsibilities. This submission covers
aspects of that regulatory role. In particular, it draws the Committee's
attention to the impact of the role on the cost of borrowing across
the RSL sector. This, in turn, has a huge impact on the extent
to which private finance "stretches" public grant as
well as on the valuation of stock transfers and related transactions.
This crucial impact of regulation is often overlooked.
DECLARATION OF
INTEREST
2. I have worked in the social housing sector
since 1974 and, for the last 25 years, been a Director of the
company that is now known as HACAS Chapman Hendy Ltd. Over two-thirds
of our work is for housing associations and local authorities
and we also work from time to time for ODPM, the Housing Corporation,
NAO, the Audit Commission and other bodies associated with the
social housing sector. We advise on raising private finance for
the sector and also manage Special Purpose Vehicles that have
raised funds for social housing schemes. Our advice and management
role in relation to housing association borrowing relates to sums
in excess of £3 billion.
OUTLINE OF
THE HOUSING
CORPORATION'S
REGULATORY ROLE
3. The Housing Corporation's regulatory
role has many aspects including:
— Maintaining the register of "Registered
Social Landlords" approving rule changes, disposals, mergers
and group structures etc.
— Maintaining and raising standards.
— Coping with problem cases.
4. The role and the delivery mechanisms
for accomplishing have evolved and changed over the last 30 years.
At present, a substantial proportion of the role is devolved to
"field offices" but aspects are still dealt with centrally.
DIFFICULTIES IN
UNDERTAKING A
REGULATORY ROLE
5. The range of regulatory roles that Parliament
has given to the Housing Corporation is wider than for most regulatory
bodies. There is a lack of precision in the definition of the
role and this contributes to arguments about whether it is being
carried out appropriately or successfully. A further complication
is that housing associations are an astonishingly diverse group
of organisations. There are just over 2,000 associations on the
register, but of these, around one-third have no staff and one-third
have less than five staff. However, the largest associations have
assets in excess of £1 billion and turnover in excess of
£100 million. It is impossible to apply the same standards
or criteria to such a diverse range of organisations. The role
is therefore much more complex than that of the bodies that regulate
other providers of key services to the public (such as utility
companies).
IMPROVEMENTS IN
REGULATION
6. We undertook some work for the DETR in
evaluating the Housing Corporation's organisational proposals
in the context of the last FMPR. At that time, the Housing Corporation
considered that it was "off the pace" in the discharge
of its regulatory function. Resources were shifted from its investment
role to its regulation role and it subsequently established its
inspectorate function that was then transferred to the Audit Commission.
The Corporation's financial management of housing associations
has also been subject to separate scrutiny.
7. Our assessment of the Corporation's current
regulatory focus and performance is that it has been enhanced
by the changes it has made as a result of these various reviews.
The monitoring of financial viability is both more sophisticated
and significantly faster than it used to be. In general terms,
the increased level of resources at a "field office"
level has been positive. The Corporation has learnt lessons from
some of the more complex cases (see Learning from Problem cases
volumes 1 & 2 published by the Corporation in 2001 and 2003).
8. However, the sector continues to evolve
and an increasing proportion of social housing is being concentrated
in the ownership of a relatively small number of housing association
groups. Regulating large and complex groups that often extend
across "field office" boundaries poses a particular
challenge. The scale of new housing and regeneration projects
also creates risks on a much larger scale. While this is an inevitable
consequence of the drive to secure economies of scale, it does
nothing to simplify the task of the sector's regulator. In short,
we believe that the task of regulating the sector is becoming
increasingly complex.
RELATIONSHIP WITH
OTHER "REGULATORS"
9. Most housing associations are also registered
with the FSA (as Industrial & Provident Societies) and a small
number are registered with the Charity Commission. The additional
work caused by this multiple registration is not that significant.
However, the transfer of the Housing Corporation's registration
functions to the FSA would impair its ability to regulate a number
of key areas including:
— The viability of organisations becoming
registered.
— Mergers and group structures.
— Control of asset disposals.
10. The transfer of the Housing Corporation's
new inspection function to the Audit Commission has, in our view,
worked well. The Audit Commission has particular skills in service
delivery standards and this was not, historically, a significant
element of the Housing Corporation's earlier regulatory functions.
Although we are very positive about the way the Audit Commission
has carried out this role, we see it as very different from the
wider sector regulation role still undertaken by the Housing Corporation.
The transfer of such functions to the Audit Commission would not
be playing to its natural strengths. We also consider that the
role is markedly different from that undertaken by the FSA, Charity
Commission and NAO. We would not recommend any changes that might
undermine the value of the current regulatory arrangements which
we summarise in Section 8 below.
PERCEPTIONS OF
REGULATION
11. We are not aware of any regulated sector
where those regulated either enjoy it or are happy with the way
in which it is carried out. That it is a source of continuing
tension between associations and the Housing Corporation is, in
our view, inevitable. Regulation was at one point extremely process-driven
and inappropriately prescriptive. The current regulatory approach
is less prescriptive and more outcome focused and this has generally
been welcomed by associations.
12. Lenders to the sector have an extremely
positive view of the Housing Corporation's regulatory role. They
see it as providing a level of comfort that is absent from most
other sectors. While their own financial monitoring of housing
association borrowers is likely to duplicate aspects of the Housing
Corporation's financial monitoring of associations, this does
not concern them. What has continued to impress them is the way
that the Corporation has secured acceptable solutions to those
cases where associations have run into severe financial or other
problems. As a consequence of this "troubleshooting"
regulatory role, lenders have had a virtually trouble-free experience
since private finance to housing associations was introduced in
1988.
VALUE OF
REGULATION TO
THE GOVERNMENT
AND THE
SECTOR
13. The success of the sector and its regulator
in avoiding any financial disasters with adverse knock-on effects
for lenders has had a decisive influence on the levels of security
and fineness of the margins on which housing associations can
borrow. This has two aspects. First, banks lending to the sector
have a FSA capital adequacy weighting of only 50% of that applicable
to lending to other companies. This effectively halves the margin
on which housing associations can borrow. Additionally, the fact
that lenders have suffered no financial loss in lending to registered
housing associations since 1988 is primarily attributed to the
Housing Corporation's role in facilitating solutions to those
in severe financial difficulties. In our view, it is at least
equivalent to 1% saving on margin and the benefit of this can
be assessed in relation to total sector borrowings that are now
around £30 billion. This equates to a saving of around £300
million per year.
14. The margin at which associations borrow
has a direct impact on the extent to which any given level of
grant will secure additional housing outputs. Because of the way
in which associations bid for grant funded projects, the benefit
of lower margins is effectively secured by the Government in terms
of lower levels of subsidy for any given level of required housing
outputs. The consequential savings to the public purse is very
much greater than the grant in aid to the Housing Corporation
that funds this regulatory work. The benefit to the Government
and the sector is therefore immense and should be taken into account
in any assessment of the Housing Corporation's work.
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